The housing risks for one retailer are “too big” to recommend investors to buy shares, one analyst ... [+]© 2021 Bloomberg Finance LP
As home sales tumble to the lowest level in years, a rash of industries tied to the housing market are starting to show signs of deterioration, with home builders, appliance makers and some retailers among those likely to take the biggest hit as experts worry the downturn could spark a broader recession.
In a Tuesday report, Bank of America noted the rate of wire payments to escrow and title companies—typically used to pay deposits for home sales—have fallen this year for the first time since the Covid recession in mid-2020, according to consumer spending data, adding to mounting signs of a housing market slowdown.
The impact has perhaps been felt most by home builders, who in August declared that the nation has fallen into a “housing recession” and have seen shares tumble more than 30% this year, according to the S&P Homebuilders Select Industry Index, which includes home-manufacturing giants such as Masco and Owens Corning; the broader S&P 500 has fallen 24%.
Bank of America notes the slowdown could also be a drag on consumer spending due to the impact on housing-related segments, most notably furniture spending, which has a “historically close” relationship with housing sales and has already fallen more than 10% year over year.
In past housing cycles, including the collapse that sparked the Great Recession more than a decade ago, furniture spending didn’t hit its low until a few months after home sales did, so Bank of America notes that further weakness could still lie ahead.
Others susceptible to the decline include appliance makers, in-home entertainment companies and consumer electronics firms including Best Buy, whose CEO last year pointed to the booming housing market as reason for better-than-expected sales on items like TVs and home theater setups.
Analysts aren’t yet convinced the housing-related fallout alone will trigger a recession, but the impact could be big: Harvard researchers have estimated the market’s effects have accounted for at least one quarter of the growth in personal consumption expenditures, which command a hefty 70% of the nation’s gross domestic product.
Though overall retail sales climbed in August, demand for items like furniture and electronics has fallen nearly 2% and 6% year over year—the only negative yearly changes among the types of businesses tracked by the Commerce Department, according to the latest data.
The one housing-related industry in which more consumers say they’ll spend more—instead of less—is home improvement, notes Bank of America. On Monday, R5 Capital analyst Scott Mushkin downgraded Lowe’s stock and said risks to the housing market are “too big” for him to recommend that investors buy shares, but other analysts, including Atlantic Equities’ Sam Hudson, note the post-Covid environment bodes well for home-improvement firms, particularly since fewer Americans buying homes may mean more people are likely to invest in their existing property.
The housing market continues to be one of the sectors hardest hit by the Fed’s rate hikes, and concerns that the downturn could spark a recession have only intensified as a result. With mortgage applications plummeting to their lowest level since 1997, some analysts predict the plunging demand will spark a correction in home prices. On Tuesday, the International Monetary Fund said the “potential contagion effect” of such a correction would likely be “more limited than in previous recessions,” but it noted risks are emerging elsewhere in the housing sector, especially in the United States, where more firms have started playing a role in the securitized mortgage market.
Critics by Jonathan Ponciano
Mortgage applications plummeted 14.2% from one week prior in the seven days ending Friday, pushing overall applications to their lowest level since 1997, according to data released Wednesday by the Mortgage Bankers Association. Surging rates have tacked on $337, or 15%, to the typical monthly mortgage payment over the past six weeks alone and pummeled housing demand nationwide as a result—so much that prices have started to slip from record highs in some markets over the past few weeks.
According to real estate brokerage Redfin, the median home sales price has climbed 7% to $369,250 over the past year, but prices in San Francisco have ticked down 4%, while those in neighboring Oakland and New Orleans have fallen 0.5% and 11%, respectively. Though he’s not expecting a nationwide correction, Tejas Joshi, a director at investment firm Yieldstreet, expects home prices could face 20% decline in some regional markets where new home construction will bolster supply— builders will be forced to slash prices “aggressively” in the coming months in areas like Dallas, Austin, Texas, and Boise, Idaho.
He also expects the correction will be worse for pandemic-era hot spots like Phoenix, Austin and Las Vegas that have seen an influx of new residents over the past two years, exacerbating affordability concerns that have made some markets—including a high concentration in the western U.S.—vulnerable to a housing market correction, according to Goldman Sachs. Goldman notes that 9% of active listings have cut prices on Zillow (mainly in areas that saw a sharp run-up in prices during the pandemic), which suggests that less affordable areas—such as Western cities like Seattle, San Diego and Los Angeles—are most susceptible to a correction, while more affordable metros in the South are likely better positioned to avoid one.
Goldman chief credit strategist Lotfi Karoui says national home prices will likely avoid a correction next year, but he expects 39% of metropolitan areas will experience price declines.“It’s important to remember that much of the housing market data . . . being reported are based on home purchases that were agreed to a month or more ago, when mortgage rates were a point and a half lower,” says Redfin economist Taylor Marr. “Sellers should anticipate that buyers are unwilling or unable to pay a price similar to what their neighbor’s home sold for a month ago.”
Other areas that may not face much of a housing price correction are those with low levels of new construction, says Joshi. He notes many markets in the Northeast, for example, have “quite low” incoming supply and that most sales come from existing homes, making it likely that homeowners will simply stay in place for longer as opposed to selling at lower prices.