From Bad to Worse: The Bottom’s Not in Yet for This Sector

|October 15, 2022
BAD-WORSE road sign

Oh boy… things have gone from bad to worse.

After five consecutive rate hikes, it’s clear Jay Powell and the Fed have been firing blanks.

Moving from near-zero interest rates to 3%-3.25% has barely made a dent in red-hot inflation numbers.

The CPI for September came in at 8.2% year over year, higher than the 8.1% expected. And it was 0.4% higher than the previous month.

The news guarantees further stiff rate hikes… and proves we’ve got a long way to go in this economic battle.

For weeks we’ve been telling you about some of the short-term opportunities traders can jump on, but there’s one sector that’s troubles are far from over.

From Bad to Far, Far Worse

The housing market has gone from bad to far, far worse.

The 30-year fixed mortgage rate clocked in at 6.92% this week, a 20-year high. It’s more than doubled since the start of the year.

30-year fixed mortgage

And the news that more rate hikes are coming means mortgage rates won’t be coming back down anytime soon.

While long-term mortgage rates aren’t determined by the federal funds rate (the short-term interest rate we all know and love), they are certainly influenced by it.

If the market believes the federal funds rate will remain high, that will apply upward pressure on long-term rates.

At the same time, housing prices still remain inflated. After peaking in June, prices have come down a bit. But we’re still in the stratosphere compared with where we started the year…

Median Sales Price of Existing Homes

New home prices have taken off since the start of the pandemic and haven’t backed down…

Median Sales Price for New Houses Sold in U.S.

Adding these two trends together, we get some scary math.

At the current rate, the monthly mortgage payment for a median-priced ($427,000) home with a 20% down payment is $2,254, according to Realtor.com. That’s 75% more than it was the same week last year, and it adds about $11,600 to the yearly burden of financing a home.

No surprise, then, that mortgage applications for purchases are down 39% from a year ago… and contract signings are down 24.2% year over year.

More and more folks are getting priced out of homes… and the slowing activity is taking a toll on homebuilders.

Homebuilder sentiment fell for the ninth month straight in September. It’s in negative territory at a reading of 46 – the lowest sentiment has been since 2014.

It’s easy to see why…

According to U.S. Census Bureau figures, there were 14% more homes under construction this August than there were a year ago, when the sales market was stronger.

With few buyers in the market, homebuilders are holding on to a lot of inventory.

That means they’re getting desperate…

According to the National Association of Home Builders, 24% of homebuilders reported reducing home prices in September, up from 19% a month prior.

Major homebuilders, including Lennar and KB Home, have walked away from contracts to buy thousands of lots for future building projects.

And now homebuilders are selling homes in bulk as a way to quickly offload inventory. They’re reaching out to real estate investors and rental-home investors… and even offering discounts of up to 20% to sweeten the deal.

But with rising mortgage rates, even offloading inventory in bulk is no sure thing. New homes accounted for just 2% of total investor home purchases in July, compared with 6% in the second quarter of 2020.

Put all these pieces together… and we get a clear picture that a recovery in the housing sector is nowhere in sight.

And as inflation continues to hold strong… we haven’t even hit bottom yet.

There’s more pain ahead.

Amanda Heckman
Amanda Heckman|Editorial Director

Amanda Heckman is the editorial director of Manward Press. With unrivaled meticulousness, she has spent the past dozen or so years – give or take a few sabbaticals – sharpening Andy’s already razorlike wit. A classically trained musician and a skilled writer in her own right, Amanda takes an artistic approach to the complex world of investing. Her skill has led her to work with numerous bestselling authors, award-winning financial gurus and – lucky for us – the fine folks at Manward Press.