One of the biggest reasons the economy has stabilized since the financial crisis has been the fact that housing has stabilized.
Investors who identified this turnaround in 2011 were richly rewarded, too; housing stocks including Toll Brothers (TOL), D.R. Horton (DHI) and PulteGroup (PHM) have doubled or even tripled the returns of the S&P 500 over the last three years or so.
Home prices are moving higher, and the S&P/Case-Shiller home price index is actually at its highest levels since spring 2008. Additionally, foreclosures have declined and in many areas the amount of sales involving distressed properties is down significantly over last year and years prior.
However, there have been a few disturbing data points as of late that could signal the recovery at housing is hitting a snag — or worse, that we are about to see home prices and home sales swing back in the other direction.
After all, while the returns from the bottom a few years ago are still good, there’s no doubt that many homebuilders and related housing stocks have declined lately. Just take building supply company Lumber Liquidators (LL), down 45% year-to-date, as the biggest example. In fact, the SPDR Homebuilders ETF (XHB) is actually down about 7% since January, despite a 6% gain for the broader stock market — proof that the sector broadly is running into trouble.
So what gives? Here are a few reasons:
- Housing Starts: Seasonally adjusted, housing starts just fell to 893,000 according to the Census Bureau. That’s the slowest pace in nine months, and the biggest factor was a drop in single-family home construction which fell 9% in June to the lowest pace for this segment since November 2012. Most estimates were for around 1 million starts, so that’s a big miss.
- Housing Permits: Future demand doesn’t look that great, either, with permits down 4.2% in June to 963,000. It is worth noting that permits for single-family homes did rise as a subsegment, but the headwind on construction is clear.
- Mortgage Applications Fall: The Mortgage Banker’s Association reported this week that applications dropped 3.6%, and seasonally adjusted there are at the lowest level since February. Rates are starting to rise, which seems to be deterring borrowers, and there simply isn’t as much demand as Americans struggle to rebuild savings and shoulder the costs of a home sale.
Of course, it’s not all evil out there for the housing market. There are some signs of hope, too:
If there was a risk of a housing crash, surely builders would be feeling it. However despite some softness in share price for publicly traded homebuilders, optimism — and business — is strong. The Federal Reserve’s Beige Book report of current economic conditions indicated that 10 of 12 districts showed increased residential construction over a few months ago. Furthermore, the National Association of Homebuilders report of builder confidence put optimism at the highest levels in six months. It doesn’t feel like doom and gloom to the builders, which is telling.
Other indicators are a bit more mixed, such as inventories in many markets being up slightly in the last year but not at the cost of sales or pricing.
So what does all this mean for housing? Nothing just yet … but if these negative indicators start to stack up, it may be time to take a closer look at your exposure to real estate and housing stocks.
If you own homebuilders or the XHB ETF you’ve likely already felt some pain this year. But there may be much more to come.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.