We have a 6-month-old puppy named Ace. It’s not always easy to remember that he’s a puppy when he tries to sit all of his 50 pounds in my lap.
But then we take him outside…
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Every darting lizard, scampering squirrel and friendly neighbor grabs his attention from what we’re supposed to be doing.
Of course, he’s a puppy. He’s supposed to have a short attention span.
I’ll admit I can have the same problem when it comes to stocks and a flashy piece of data.
You know the type. The big, juicy data that comes in ahead of analyst expectations. Clearly, it’s pointing to big things.
But it’s important to remember that the data reflect what’s already happened. While it looks tempting right now, it could be distracting you from a much bigger problem looming on the horizon.
There’s one sector that’s got some great-looking data, but that’s just masking an even bigger problem…
Look Past the Headlines
The homebuilders sector is looking at a one-two punch that is going to knock it out.
It might be a little hard to believe. I understand. I’ve seen the data that have come out recently.
Existing home sales for March rose 1.1% to a seasonally adjusted annual pace of 5.6 million. Analysts had expected sales of 5.52 million. That’s a four-month peak! Half the existing homes sold in March were on the market for fewer than 30 days.
The National Association of Realtors (NAR) reported that its pending home sales index increased 0.4% in March.
What’s more, new home sales jumped 4% to a seasonally adjusted annual pace of 694,000. That’s up 8.8% from a year ago, and the highest pace since November.
Year to date, sales are up 10.35% from the same period a year ago.
That’s some gorgeous data. The headline numbers look amazing. It certainly looks like everything is going great in the housing sector. Why should I think anything is amiss?
Let’s look at two key data points that could turn the tide…
Problem No. 1
NAR continues to remark on an incredibly tight inventory for the housing market. At the current pace, it would take 3.6 months to sell all the existing homes in the current inventory. That’s down sharply from the long-time average of six months.
For new homes, it would take 5.2 months to exhaust the current inventory at March’s pace of sales. That’s also down from the average.
When inventory becomes tight, prices naturally rise.
The median price for a new home rose 4.8% from a year ago. The median price for an existing home sold in March was $250,400, up 5.8% from a year ago.
Home prices are rising at a faster pace than wages are rising. That’s not a good combo.
If there aren’t enough homes on the market for the price range that would-be buyers need, then home sales slow. Possibly at a significant rate.
Problem No. 2
Rising home prices aren’t the only crunch that buyers are facing. Interest rates are also on the rise.
The 10-year Treasury note reached 3% recently, the highest level since 2014. And it’s not going to stop there.
The Federal Reserve is looking to boost rates even further this year. While Fed Chairman Jerome Powell and his crew start their two-day Federal Open Market Committee meeting today, Wall Street isn’t banking on a new rate hike. However, traders are pricing in a new 25-basis-point rate hike at the mid-June meeting.
Higher interest rates just made that perfect home a little more expensive.
Shut Out of the Market
The economy is humming along. Nearly everyone who wants a job has one. Wages are finally on the rise. It looks like conditions are perfect for the housing sector.
But wages aren’t rising fast enough to keep pace with the rising cost of homes and the steady rise in interest rates, thanks to the Fed. Would-be buyers are finding themselves priced out of the market.
It’s like watching buyers get stretched out on the rack — a medieval torture device. One slow turn after another of rising prices and inching interest rates until they finally snap. No more buyers. Demand dries up, leaving homebuilders in trouble once again.
It might not happen with the next rate hike. But it’s coming.
Homebuilders are on borrowed time.
Sr. Managing Editor, Sovereign Investor Daily
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