As mortgage rates topped 6%, for the first time since the 2008 financial crisis, new home buyers are being squeezed on multiple fronts since elevated home prices, interest rates, and rising inflation are adding to everyone's bottom line.
With the bond market pricing in the Fed hiking interest rates by at least 75 bps, investors can expect more pain to come in the housing market, which will trickle down to the rest of the economy.
For instance, when home sales fall, other parts of the economy also decline, sending headwinds to home retailers that provide furniture, hardware, appliances, lighting and fixtures, as well as decor.
What Happened: Early Monday, the Zillow Group (NASDAQ: Z) announced that 5.1 million existing home sales are expected in 2022, down 16.4% since 2021, which was the strongest calendar year for home sales since 2006.
Also, Zillow expects home value growth to slump over the next year, from the current rate of 14.1% annual growth to 1.4% in 2023, which was a downward revision from August’s year-ahead outlook of 2.4%.
Similarly to Zillow’s online buy and sell services, home flippers such as Opendoor (NASDAQ:OPEN) Technologies Inc (NASDAQ: OPEN) have also been hit by rising interest rates, as the company lost money on 42% of its transactions in August, according to YipitData.
Opendoor's pricing problems are starting to resemble the same issues Zillow had before exiting the buying and selling business. Mike DelPrete mentioned that his analysis shows that September is likely to be even worse than August, although it doesn't mean Opendoor will close the door on this business segment.
Also Read: Investors Should Not Confuse The Current Housing Market With 2008
Home Retailers: Since home prices are beginning to fall, while inflation remains at historic highs, many home retailers are beginning to cut guidance and miss earnings expectations. This can be attributed to consumers spending less on filling their homes with goods and necessities, as fewer home buyers are entering the market.
In the second quarter, home product e-commerce supplier Wayfair Inc (NYSE: W) saw total net revenues decline by 15% year-over-year, and gross profits shrank by 20.5% year-over-year.
Furthermore, direct-to-consumer pool and spa care brand Leslies Inc (NASDAQ: LESL) cut its full-year 2022 sales guidance to $1.55 billion - $1.57 billion from $1.575 billion - $1.61 billion, below the consensus of $1.59 billion.
“While we have addressed our distribution center issues and operations are now shipping to plan, we have revised our annual outlook to reflect our third quarter performance, as well as expectations for elevated distribution costs and product margin impacts for the remainder of the year” said Mike Egeck, Chief Executive Officer.
The Last Word: As interest rate hikes are expected to continue through the rest of the year, investors should be wary of retailers that rely on new home buyers looking for products to fill their homes.
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