XHB: Median home prices are expected to fall, perhaps significantly (NYSEARCA:XHB)

the SPDR® S&P Homebuilders ETF (NYSEARCA:XHB) It has risen about 50% since its last lows in late October. Home prices continued to rise even though average interest rates on 30-year mortgages were hovering near the seven percent level.

That’s more than double the average mortgage interest rates before the Fed began its current phase of monetary tightening in March 2022.

However, all is not well in the housing sector. Existing home sales in 2023 Reached lowest levels since 1995. April on hold Home sales It fell nearly eight percent year-on-year and reached its lowest level since the spring of 2020 when most of the country was in full lockdown mode due to the coronavirus.

Median home sale prices have managed to continue to rise despite these headwinds. This is primarily due to the lack of inventory on the market and the tens of millions of homeowners who have “golden handcuffs Because of the very low interest rates on their current mortgages. This has made them very reluctant to sell their current homes, even if it means a big capital gain if they pull the trigger.

However, this is likely to change in the coming quarters, leading to at least a gradual decline in house prices. This could translate into significant price cuts if the United States heads into recession. There are many reasons why this happens. Let’s start with the fact that housing unaffordability has risen dramatically recently, which is captured well by the chart above. There is so far one can stretch a rubber band before it breaks.

High mortgage rates and few affordable homes on the market have led to a significant decline in mortgage applications (demand) as described above. On the supply side, it looks like more inventory is finally hitting the market. Realtor.com mentioned This May saw the highest number of listings for any May since 2020 and the largest price reductions for the month since 2017. And remember, May is in the heart of prime home selling season.

Additional housing inventory could kick in if the job market deteriorates, forcing more people to list their homes. We are seeing mixed signals here. BLS jobs report for April show up Only 175,000 jobs were created in April, the lowest level in six months and below expectations. This morning for May BLS a report It came in higher than expected, but the unemployment rate rose again by 0.1% to the four percent level. In addition, the latest job opportunities report in JOLTs show up Lowest number of job openings since early 2021 and ADP jobs on Wednesday number It was also less than expected.

Finally, it is clear that faltering economic growth is an obstacle to rising housing prices. Estimates of first-quarter GDP growth were recent Reviewer From 1.6% to 1.3% This growth pales in comparison to the 4.9% growth seen in the third quarter of last year and the 3.4% GDP growth in the fourth quarter. Additionally, second-quarter GDP growth expectations fell out of bed last month, as the Atlanta Fed cut its second-quarter growth estimate by more than half.

If average home prices start to decline, it will negatively impact homebuilders’ margins as they are forced to lower list prices and offer incentives (mortgage rate purchase discounts, free upgrades, etc.) to move inventory. The good news is that home builders love Toll Brothers Company (Tulle) And Dr. Horton Company (DHI) They have very low leverage on their balance sheets compared to the housing crisis they witnessed more than a decade and a half ago. Its credit ratings should remain fine even if home prices fall significantly. However, profits and margins will be affected in this scenario.

Due to this, I no longer have any involvement with the home building industry. The rise in these stocks despite the challenges facing the housing market appears to be exaggerated. If XHB returns to the $110 area and forms a triple top, I will likely open a small short position against the Home Construction ETF.