2 Big Reasons the Housing Market Will NOT Collapse

When Will the Housing Market Crash?

If you’re paying attention to the housing market crash, you should also pay attention to what history says comes next. And a historical deep-dive into housing bubble trends tells us there’s nothing to worry about with the current correction. In fact, what we’re seeing today is a great normalization of the housing market, not a great crash in the housing market.

Let’s unpack this.

What kicked off the latest downtrend in housing was the National Association of Homebuilders Index, which came in below analyst estimates and fell for the seventh straight month to its lowest level since May 2020. The latest drop was also the second-largest decline in the history of this index. Now, I’ve stated multiple times that the housing market will not crash.

This data still doesn’t change my stance.

For one, we’ve seen big drops in the homebuilder index below 60 – its critical line – before. Almost always, they’re one- to three-month drops that don’t lead to home price declines. December 2018, March 2016, March 2015, May 2014, April 2003, October 2001 – all periods like July 2022, where homebuilder sentiment plunged below 60; and all periods where homebuilder sentiment immediately and strongly rebounded.

The exceptions to the trend were 2008 and the late 1980s. But today’s inventory constraints keep us from repeating those eras. Rather, what we’re looking at is more representative of a housing market that’s normalizing to pre-COVID levels after a two-year period of exceptionally elevated demand. That’s normal and healthy – and positive for housing stocks such as Opendoor (OPEN).

And that’s been our thesis for months now. What are the two big reasons behind why I say that? Supply and demand. We are in the most supply-constrained housing market of all time. After the subprime mortgage crash, consumers grew hesitant within the housing market. The lack of consumer confidence and drop-off in demand led to a years-long period of under-building. After COVID hit, demand for homes has gone through the roof (no pun intended). But it’ll take a decade of overbuilding for us to crawl our way out of this inventory hole. So, with ultra-low supply and ultra-high demand, you can be sure this is not a housing market crash.

Cathie Wood Stocks Break Out

Growth stocks have been outperforming over the past few weeks, and Cathie Wood’s ARK Innovation ETF (ARKK) stocks are no exception.

Within Wood’s ETF, I’ve noticed an interesting pattern forming within that portfolio – an ascending triangle.

This happens when there’s a consistent line of resistance – or around where the stock tops out. At the same time, there’s an increasing support line, where it typically bottoms out. And normally, at the point where the two lines converge, you get a massive breakout to the upside. And indeed, this pattern isn’t just forming in Cathie’s ETF but across several of her holdings.

This bullish technical pattern implies we’re due for a short-term breakout in growth stocks. And I think that lines up fundamentally with where we are in the cycle. Inflation fears have receded, and recession fears have moved front and center. The Fed is playing hardball, and inflation rates are finally decelerating. The growth-to-value ratio is rebounding after its 2022 plunge, and yields are coming back down.

And if we look to the future, as the markets do, what does 2023 look like? Low inflation and a slow economy. That’s the kind of economy the Fed will stimulate with potential rate cuts, or quantitative easing (QE). And growth and tech stocks – such as those in the ARKK ETF – will soar.

The Earnings/Fed Double Whammy

Now, the one caveat? Earnings season. Indeed, this season will be one for the record books, in all the worst ways. As I’ve said before, this recovery will be two steps forward, one step back. With earnings, we will definitely take a big step back.

At the same time, we’re nearing the Federal Reserve’s monthly meeting, and investors are focused on the next big incoming rate hike. Will the central bank hike 75 basis points or 100 basis points? Now, I think it should go 100 bps, but I don’t think it will. Over the past few days, three Fed officials have implied they’re leaning away from a higher rate hike. And in fairness, 75 bps is still a jumbo hike, which should do its intended job – kill inflation.

Since this next Fed move is happening concurrently with earnings season, the central bank will likely be the two steps forward in this recovery, and earnings will be the step back. Bottom line: We’re looking at a tug of war over the next few weeks and I’m expecting some volatility. But after it’s over, I think growth stocks will take another two big steps forward.

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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

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