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4 Reasons Why Housing Looks Poised for a Big Rebound


  • Macroeconomic conditions should result in a strong housing rebound in the medium term.
  • Interest rates look poised to fall, while the labor market remains very strong.
  • Homebuilders are already seeing signs of a rebound.
  • The housing supply is too low to meet demand.
housing rebound - 4 Reasons Why Housing Looks Poised for a Big Rebound

Source: shutterstock.com/CHOTTHANIN THITIAKARAKIAT

It’s probably hard for those who are bearish to believe, but the alignment of the macroeconomic stars is poised to support a housing rebound.

Specifically, the overall labor market remains strong, while interest rates are dropping and are likely to fall further as inflation’s deceleration gathers steam later this year. Meanwhile, homebuilders are already seeing many signs of a recovery in the housing market, while home prices have been continuing to climb year-over-year.

And most importantly, the housing market generally continues to be characterized by supply that’s too low to meet demand, particularly in the rapidly growing Sunbelt states.

The Labor Market Remains Strong

Source: Freephotos.cc/

Defying the predictions of the many bears who have expected the labor market to show tremendous cracks for many months, it has, in actuality, stayed quite resilient.

Indeed, The Wall Street Journal recently noted that jobless claims are still “historically low,” while “the broader labor market remains robust.”

With the labor market remaining strong, many consumers will have the funds, credit rating, and confidence they need to buy houses, despite the fact that interest rates are much higher than they were a year ago.

Interest Rates Are Dropping and Will Sink Further

interest rates
Source: kenary820 / Shutterstock.com

As of March 23, the mean interest rate on 30-year mortgages had dropped to 6.4% from 6.6% in the previous week. And the fact that the Federal Reserve is probably done raising rates this year will put downward pressure on rates, supporting the housing rebound.

Meanwhile, many on the Street expect the Fed to begin cutting rates this year because the economy will slump. I agree that there is a good chance that the Fed will cut rates, but for different reasons: declining inflation and the fact that a small percentage of regional banks will need help with their balance sheets.

Many expect inflation to drop sharply later this year as more rent leases are renewed with lower increases. Among those with that view is the University of Pennsylvania Economics Professor Jeremy Siegel and Gregory Daco, EY’s chief economist, who expects annual inflation to sink to around 2.3% around December.

Moreover, the Fed will want to cut rates to help the small number of regional banks that bought and held too many Treasury bonds that mature far into the future, putting them in bad positions. That’s the case because these instruments’ prices have sunk largely due to the Feds’ rate hikes. By lowering rates, the central bank will cause the prices of these bonds to rise, helping the banks.

Signs of Recovery and Latent Strength

Source: Shutterstock

On March 15, Stuart Miller, the Executive Chairman of Lennar (NYSE:LEN), a major homebuilder, reported that, in January, when mortgage rates were close to their current levels, he saw “energized customer and improving margins,” He added that “the housing market is beginning to find a point of stabilization and customers, both primary and institutional are coming to grips with the new normal of higher but acceptable interest rates.” Finally, Miller reported that “cancellations have been normalizing lower and [homebuilders’] margins have been bottoming.”

Miller’s comments strongly indicate that the market was bottoming and beginning to recover even before the latest interest rate declines.

Moreover, housing prices continue to climb in most U.S. cities year-over-year, even amid the weaker housing market. For example, the S&P CoreLogic Case-Shiller U.S. National Home Price Index rose 3.8% year-over-year in January and advanced 5.6% YOY in December.

The Supply of Housing Is Too Low

Flat cut-out image of house jammed into the crack of dry desert, symbolizing housing crisis
Source: shutterstock.com/Roman Bodnarchuk

For a few reasons, the housing supply appears to be too low to meet demand. First, as Lennar’s Miller noted, the number of homes built in the wake of the Great Recession was too low to meet demand. Exacerbating this situation has been the work-from-home phenomenon which has caused many Americans to leave cities and move to suburbs and exurbs.

Another factor is that when interest rates were very low, many homeowners locked in those low rates, making them very reluctant to sell their homes now and buy new ones. That’s because they will have to pay much higher interest rates when they buy new homes and take a mortgage.

Finally, the large migration to the Sunbelt contributes to major housing shortages in that part of the nation.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.

Article printed from InvestorPlace Media, https://investorplace.com/2023/03/4-reasons-why-housing-looks-poised-for-a-big-rebound/.

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