Housing markets in deep recession

What happened in the market this week?

Market insights for the week ending September 23

Stock markets remained under pressure last week, with the S&P 500 index trading at its lowest level since mid-July. The energy and consumer appreciation sectors completely reversed their positive trends last week, and the telecom and real estate sectors continue to be hit hard.

Market pessimism worsened last week due to Last Wednesday’s Fed rate decision to raise interest rates by another 75 basis points, while raising the target range to between 3% and 3.25%the highest since 2008. This also came with the 10-year US Treasury yield exceeding 3.6% for the first time since 2011.

The performance of the American sector 7D – September 23, 2022 – Simply Wall Street

This week, we’re looking at the housing markets in the US and around the world:

  • The US housing market is already going through a deep recessionThis was confirmed by the economic data released last week.
  • We also took a look at some files The housing markets with the most bubbles around the world are: Portugal, Canada and New Zealand.

US housing market in ‘deep recession’

Some key indicators in the US housing market are not pointing to a bright year ahead. The NAHB Housing Market Index, according to the National Association of Home Builders website, is based on a survey that “asks respondents to assess market conditions for selling new homes right now and in the next six months as well as the traffic of potential new home buyers.”

Introduction on a scale from 0-100, The NAHB index registered at 46 last week (the black dotted line in the chart below), compared to the 48 expected by analysts and 84 at the start of the year.. In general, an NAHB index of 50 or lower means that home builders are seeing poor selling conditions. So now is not a great time to be a home builder.

Regardless of a few months at the start of the pandemic, the index is now at its lowest level since 2014. This reflects a general loss of confidence in the housing market and its outlook.

US NAHB Housing Index vs. US Housing Starts Image rights: Trading Economics

On the other hand, the data on housing construction (blue line), released last Tuesday, was higher than expected and actually rose 12.2% on a monthly basis. With that said, building permits fell by 10% on a monthly basis and were less than expected. So we’re getting somewhat conflicting signals here, but overall sentiment seems more pessimistic.

What is the relationship between high interest rates and real estate?

Higher mortgage rates usually act as an allure in real estate appraisals. They lower ratings when those rates go up, and they increase ratings when those rates go down. These mortgage rates are based on benchmark interest rates such as the Federal Funds Rate. Therefore, when the Fed raises its benchmark rate, the cost of home financing rises as retail banks pass on the rate increase to consumers. So all else being equal, mortgages become less expensive, and you expect home prices to fall accordingly.

The worst days of the S&P 500 in 2022 Image rights: CNBC

Looking at the current data, there is no doubt that the US housing market is in a major recession. Construction confidence fell for the ninth month in a row, new home sales in July fell 29.6% compared to July last year, and existing home sales fell 20.2% in July year-on-year.

In our previous insight into the market, we explained why home prices may take some time to actually fall when the real estate market slows down. As of June, home prices are still high to date, but are roughly flat on a monthly basis. However, the house price index is the average of the data for the entire country – prices have already fallen in the most overestimated cities.

It seems inevitable that home prices in most areas will eventually fall as prices continue to rise and home sales slow. This affects not only the real estate market and allied industries, but the entire economy.

How does real estate affect the rest of the economy?

For many homeowners, their homes are their most valuable possession, and this creates a psychological “wealth effect” among consumers. When home prices rise, consumers feel richer and tend to spend more. Of course, the opposite happens when home prices fall. In fact, analysts have indicated that GDP will decline in the coming months as consumers tighten their discretionary spending to cover higher mortgage payments.

The slowdown in housing is causing ripples across the economy. Most consumer-facing businesses receive less demand for their products and services, construction slows (as we already see) and banks issue fewer loans and can even face defaults on their loan book.

Insight: Real Estate and the Economy

As interest rates continue to rise, this will increase pressure on the real estate market and on consumer spending. Homeowners with variable rate mortgages may become forced sellers if their mortgages become too expensive.

The counterargument from some economists is that more pressure on the housing market may cause prices to peak sooner. Ian Shiperson, chief economist at Pantheon Macroeconomics, believes the housing market slump could cause the Fed to slow the pace of rate hikes. Ultimately, the Fed wants to control inflation, and a slump in the housing sector may help by reducing demand.

For short or medium term investors (less than 5 years)

Unfortunately, the constant pressure on consumers offers very few areas of safety. Until the end of an interest rate hike appears likely, investors are likely to turn to defensive sectors (utilities, healthcare, consumer goods) – continuing to outperform. By contrast, companies in the real estate sector may see lower income or even lower revenue in this environment, as higher rates deter consumers and supply chain problems continue to drive up construction costs.

There are always exceptions within every sector—companies like Home Depot (NYSE: HD) could benefit if homeowners decide to make improvements to existing homes instead of trading. However, this must be weighed against the general sentiment in the sector.

Watch our company analysis on Home Depot by clicking on the image! – Image Credit: Simply Wall St Home Depot

For long-term investors (5+ years)

As always, long-term investors can use bear markets to find great long-term opportunities. Most novice investors make the mistake of investing only in a bull market and staying away from a bear market, when bear markets have the best entry point for those with at least 5 years of investing in the time horizon.

If inflation and rates eventually return to normal, many of the sectors affected by this latest recession have the potential to do well in the long run. If you are investing for the long term, it is important to focus on potential future earnings growth, and not get caught up in market noise in the short term.

Real estate bubbles around the world 🌎

Outside the US, home prices are also starting to lose their froth as interest rates are rising around the world. Markets with the highest probability of being in a housing bubble tend to experience the worst effects of a housing downturn, and as such, we will discuss this situation in depth.

What factors contribute to the housing bubble conditions?

Determining which markets are most at risk will always be subjective. These are some of the factors that contribute to the formation of bubbles:

  • Affordability A combination of home prices, median income and mortgage rates.
  • speculation More speculative property leads to more risks.
  • price estimate – Prices often go down more than others where they have gone up the most before.

In October last year, UBS published a real estate bubble index that ranked Frankfurt, Zurich, Munich and Vancouver as major housing bubbles.

Recently, in June, Bloomberg published another report on housing bubbles, this time based on countries rather than cities. The report identified 19 countries in the Organization for Economic Co-operation and Development that have lower affordable home prices than they did before the 2008 financial crisis.

Countries with the highest property risk Image rights: Bloomberg

At the top of the table (that is, the most dangerous) are New Zealand, the Czech Republic, Hungary, Australia, Canada and Portugal. Let’s take a look at the Portuguese, Canadian and Kiwi housing markets.

Portugal 🇵🇹

The housing shortage has caused prices to rise sharply in Portugal’s cities, but prices are now among the most unaffordable in the world. Adding to the risks is the fact that up to 93% of mortgages have variable interest rates. With rising mortgage rates, some homeowners won’t be able to cover these mortgages until they become forced sellers. This is the type of situation that can cause prices to drop quickly.

Canada 🇨🇦

NBC and Teranet recently released their home price index for Canada which included a breakdown by city. The overall index fell only marginally, but larger declines have already occurred in some cities that saw gains of more than 70% between February 2020 and their peaks earlier this year.

Canada house prices by city from 2020 to 2022 Image rights: NBF Economics and Strategy / Teranet-National Bank

New Zealand 🇳🇿

New Zealand, which tops Bloomberg’s list, saw prices fall in May. Between June and September, house prices fell in 803 of 955 New Zealand suburbs. The scale of the declines may not be huge, but it’s the biggest drop since 2008, and it ended the decade-long housing boom.

Insight: A future view of the real estate market

The downside risks of home prices depend on a variety of factors. If homes become too expensive, prices will stop going up, but not necessarily going down. The declines come when homeowners become forced sellers simply because they cannot pay their mortgage payments.

Some economists don’t think a 2008-type crash is likely as lending standards are improved. While it would be great if this became true, the truth is that the outcome can be very different in each market depending on the amount of speculation, the number of variable mortgages, and how high mortgage rates are.

This week’s main events

It’s a very quiet week for economic data and corporate earnings.

Some companies are now starting to post third-quarter earnings, but the only notable companies to report this week are Nike (NYSE: NKE) and Micron Technology (NASDAQ: MU)both report on Thursday.

Tuesday, US Durable Goods Orders and New Home Sales to be releasedwhich will give us an indication of economic activity and housing demand, respectively.

And then on Friday, Personal Expenditure and Income in the United States and the University of Michigan Consumer Survey will be released.

until next week,

invest well,

Simply Wall Street

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Simply put, Wall Street analyst Richard Bowman and Simply Wall Street have no position in any of the companies mentioned. This article is general in nature. Any comments below from SWS employees are their opinions only, should not be taken as financial advice and may not represent the views of Simply Wall St. in their comments.We provide analyzes based solely on historical data and analyst expectations using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any shares and does not take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials.

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