Housing stocks face growing headwinds as mortgage rates slam market

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Yahoo Finance’s Brian Sozzi breaks down what slowing housing demand means for home builder stocks.

Video Transcript

BRAD SMITH: Let’s switch gears here and talk a little bit more about housing here and particularly the market because higher interest rates could be causing a slowdown in momentum for the US housing market and the many, many stocks tied to the sector. Shares of KB Home and Toll Brothers, they’re down 15% in just the past six months.

That cooldown is where we find Sozzi’s Take today, perhaps in the pantry?

BRIAN SOZZI: Perhaps in the pantry, Brad. Ultimately, this note inspired by the team over at Goldman Sachs. Chief economist Jan Hatzius out with a very new note, literally this morning, new note, housing, looking for a couple of things. First, home sales, he’s looking for an annualized decline of 12% by the fourth quarter of this year, so not a bullish note out by Hatzius and his team on housing by any stretch of the imagination.

In that same vein, also looking for a, quote, “sharp fall in home prices, 8% annualized increase in the third quarter for home prices” that is looking to slow, according to Hatzius, to 3% growth by the fourth quarter. And then guess what, by next year, Hatzius is expecting no increases in home price, essentially for that market to stay flat for home prices. So that is worth noting.

A good chart from the team as well just showing how far housing demand has fallen in recent months. Of course, we’ve seen weakness in existing and new home sales data over the past few months. And that chart really helps depict all that, in large part because of those first early rounds of rate hikes from the Federal Reserve pressuring housing. This is some commentary we heard from Toll Brothers when they reported earnings and their backlog numbers last week.

And here’s my take to consider, given all of this negativity– there is me in the house I do not have. Nonetheless, reevaluate any positions you have in companies tied to housing’s fortunes. And do it now, now, now. This is not a buy or sell recommendation, of course. This is just a good opportunity or a good suggestion to go back into your portfolio.

If you own shares of Home Depot, Lowe’s, a Toll Brothers, a Whirlpool, realize that second quarter results were not good. Guidance was not good. And with rates now going to likely increase even further in the months ahead because of what the Fed is doing, that second quarter performance for a lot of these companies could look a heck of a lot worse, and very soon.

BRAD SMITH: Yeah, I was just taking a look at the S&P 500 homebuilders ETF as well, XHB. It’s actually down 28% at this point, year to date. We’ve already seen the continued slippage in terms of the deliveries of these new homes and homebuilder confidence as well and that continuing to be one of the major factors that is really just showing how much the economy is also pricing in or just looking at it and anticipating this continued slowdown in some of the home building and the actual deliveries of these homes.

BRIAN SOZZI: I was having a real time flashback, as I often do with these takes, Brad. I was thinking back to when I was a kid at my parents’ house. I had to actually, when I mowed the lawn, put a design like at the baseball field in the lawn. An dif I didn’t do it correct, I wasn’t getting dinner. It was just really disturbing, a disturbing childhood.

BRAD SMITH: I got taken off of lawnmower duty after I started doing–

BRIAN SOZZI: Well, you got a job. You actually had a job.

BRAD SMITH: Well, yeah, I did. But for my house, I did crop circles.

BRIAN SOZZI: Crop circles?

BRAD SMITH: Yeah.

BRIAN SOZZI: You got dinner at least.

BRAD SMITH: The goal was to do it so bad that they wouldn’t make you do it anymore.

[LAUGHTER]