On Thursday, the US housing market exhibited further signs of weakness as existing home sales dropped more than anticipated. According to BMO's economist Douglas Porter, sales fell 2.5% to an annualized rate of 3.86 million in August, marking the lowest level since October 2023. The decrease was primarily seen in single-family homes, which experienced a 2.8% decline. Condo sales remained constant, although at low levels.
The data, reflecting the market at the end of summer, showed no growth across all four US regions. Despite a year-over-year increase of 3.1% in median selling prices, the momentum of price growth continued to slow. The inventory of available homes for sale saw a significant jump of 22.7% compared to the previous year, yet overall levels are still considered low.
The current inventory would take approximately 4.2 months to sell at the present sales pace, indicating a fairly tight market by historical standards but the longest duration since the 2020 economic shutdowns.
The housing market's challenges are partly attributed to the sensitivity to interest rates, which have affected buyer and seller behavior. Although mortgage rates have retreated from their peak of nearly 8%, potential buyers are hesitant to commit to purchases, waiting for costs to decrease further.
This reluctance is amidst the poorest housing affordability seen in decades. Conversely, potential sellers are holding back from listing their properties, preferring to retain their favorable mortgage terms obtained during periods of lower rates.
BMO's analysis suggests that the Federal Reserve's recent decision to initiate rate cuts, including a substantial 50 basis point reduction, may not be sufficient to revitalize the housing market. The firm indicates that additional rate cuts could be necessary to stimulate activity in this sector, which remains subdued despite the broader economy showing resilience.
In other recent news, U.S. single-family homebuilding experienced a significant rebound in August, with a 15.8% leap to a seasonally adjusted annual rate of 992,000 units, as reported by the Commerce Department's Census Bureau. This surge follows a decline in July, partly due to the impact of Hurricane Beryl and a spring surge in mortgage rates. Despite these challenges, mortgage rates have dropped to 1-1/2 year lows, potentially decreasing further as the Federal Reserve commences its policy easing cycle.
In contrast, new home sales hit a six-month low in May, with an 11.3% fall to a seasonally adjusted annual rate of 619,000 units. This downturn, sharper than market predictions, was attributed to rising mortgage rates and a decline in buyer demand. Geographically, the Northeast experienced the steepest decline with a 43.8% drop, while the West saw a 4.5% slip, the South faced a 12.0% fall, and the Midwest saw an 8.6% reduction.
These developments suggest a cautious optimism in the housing construction sector, although the full impact of the Federal Reserve's expected policy changes remains to be seen. The National Association of Home Builders survey highlighted potential competition from the growing existing home inventory. Furthermore, the median price of a new house decreased slightly, indicating builders' efforts to cater to budget-conscious buyers by constructing smaller homes.
InvestingPro Insights
The US housing market's current state, as highlighted by the drop in existing home sales, is also reflected in the performance of the SPDR S&P Homebuilders ETF (XHB). With a market capitalization of $2.34 billion, the ETF has shown significant price movement over different time frames. In the short term, the 1-week total return of 5.12% and the 1-month total return of 8.32% suggest a recent uptick in investor confidence. Over the longer term, the 3-month and 6-month total returns of 16.37% and 14.36%, respectively, alongside a year-to-date total return of 27.54%, indicate a robust recovery from earlier lows.
Investors should note that XHB is trading close to its 52-week high at 98.8% of the peak price, with the previous close at $121.64. This proximity to the high point could suggest market optimism about the sector's prospects or reflect broader market trends. The average daily volume over the past three months has been 2.11 million, demonstrating a solid trading interest in the ETF.
With an upcoming dividend yield of 0.48% and the ex-date for the last dividend on June 24, 2024, XHB could be a consideration for income-focused investors. An InvestingPro Tip to consider is the ETF's performance relative to the broader market and its sector-specific risk exposure. Subscribers to InvestingPro can access additional tips; currently, there are over 20 InvestingPro Tips available, offering deeper insights into ETFs like XHB and their place in a diversified investment portfolio.
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