Are the Fears of a Sharp Housing Slowdown Overdone?
The underlying strength in homebuilding results from the undersupply of housing that results from the low level of home construction from 2007-2020 and is seen in the 1.7 month supply of existing homes for sale – far below the six-month historical average, the multi-decade low rental and homeowner vacancy rates, and with demand supported by healthy demographic trends.
However, the higher mortgage rates and resulting impact on affordability should lead to slower, but continuing home price appreciation. In addition, the rising mortgage rates will likely impact housing turnover, affecting companies tied to repair and remodeling spending.
Homebuilding stocks have fallen 28% YTD in response to the rising interest rates, which have raised fears that the higher rates will negatively impact affordability and slow the housing cycle. A similar pull-back in homebuilding stocks occurred in 2013 and 2018. In 2013, homebuilding stocks fell by 20%, while interest rates rose by 100 bps, but the stocks subsequently fared better as interest rates stabilized.
Within building products, healthy trends for the three pillars of demand – repair/remodel, new construction, and commercial are likely to continue, driven by the aging housing stock along with record levels of home equity. While slowing housing turnover may mute growth, a recent proprietary survey still points to existing pent-up demand. Products tied to energy efficiency and outdoor living themes could continue to see above-average growth. Further, big-ticket remodeling may benefit from record levels of home equity following the increase in home prices in recent years.