Our theme of Housing Stocks which includes the stocks of home builders, building products companies, and home improvement players, is up 21% year-to-date, ahead of the S&P 500 which is up by about 15% over the same period. The outperformance comes on the back of a surge in demand for larger homes through the pandemic and rock-bottom mortgage rates. However, there are signs that the market could be cooling off.
Based on data from the U.S. Commerce Department, sales of new single-family homes in the U.S. declined unexpectedly by -5.9% in the month of May, to a seasonally adjusted annual rate of 769,000 units, marking a one-year low. The decline is likely due to rising home prices, driven by somewhat tight supply and rising raw material and labor costs.
For perspective, the median new home price in the U.S. is up about 18% year-over-year to about $374,400. Now, new home sales are typically viewed as a leading indicator of the housing market, as they are recorded when contracts are signed.
A decline in the number could point to a softening in demand. Moreover, the Fed’s recent indicator that it could raise interest rates sooner than expected is also likely to put the brakes on the rapid growth of the market.
Within our theme, the strongest performing stock this year has been D.R. Horton (DHI), one of the largest homebuilders in terms of volume. The stock is up by roughly 29% year-to-date. On the other side, Floor & Decor Holdings (FND), a specialty retailer of hard surface floorings, has been one of the weakest performers, with its stock up by about 13% year-to-date.
New home sales in the U.S. for the month of April fell by about -5.9% month over month to a seasonally adjusted annual rate of 863,000 units, based on data from the Commerce Department, driven by higher pricing and significant supply constraints.
Sales for March were also revised downward to 917,000 units from the previously reported 1.02 million units. However, the fundamentals of the housing market still remain strong. Demand is booming driven by the remote work and learning trend following Covid-19, which is causing people to spend more time at home and also due to lower mortgage rates (the 30-year fixed-rate mortgage dropped below 3% last week) which makes financing homes cheaper. The median price of a new home stood at $372,400 in April, up by about 20% from a year earlier.
Separately, the trend of working remotely could increase demand for larger homes as people look to upsize. People living in cities and more densely populated areas could also choose to move to the suburbs, driving demand for single-family homes.
That said, the longer-term picture is still somewhat fluid. Unemployment is still at multi-year highs and the health crisis may be far from over. This could make people more circumspect about taking on large, long-term commitments such as buying a new home.
This article originally appeared on Forbes.
