Existing-home sales data for September, set for release this week, is expected to show that sales slumped to the lowest level in more than a decade as mortgage rates rose. More bad news could be around the corner.
Rising rates have weighed on everything from housing market sentiment to mortgage applications in recent weeks. Mortgage rates measured by
Freddie Mac
‘s weekly gauge quickly rose past 2022’s high of 7.08% in mid-August—and largely kept climbing. The average mortgage rate last week was 7.57%, Freddie Mac said, the highest since late 2000.
Quickly-rising rates pushed home sales in August to their lowest level since January, the National Association of Realtors said last month. Because of the time it takes to close on a home, it’s likely that the anemic home sales figure reported in August represent properties that went under contract earlier in the summer—meaning the full brunt of the mortgage rates’ rise above 7%, and their continued climb into mid-October, has yet to appear in the monthly report.
That’s likely to change with the release of September’s report, expected on Thursday. Economists polled by FactSet expect existing-home sales to drop 3.5% to the lowest level since October 2010. Should the expectations come to pass, it will be the greatest month-over-month decline since November 2022, when rising rates similarly snuffed out buying activity.
Leading data has already shown how higher rates are weighing on home buyers. Only 16% of respondents to
Fannie Mae’s
September housing market sentiment survey said it was a good time to buy a house. Such a reading is tied with October and November 2022 for the lowest share in the question’s history, which dates back to 2010.
That’s translated into a low level of mortgage applications, a leading indicator of future home sales. Home loan application volume released every week by the Mortgage Bankers Association has remained near multidecade lows as fixed mortgage rates have risen, according to the trade group.
It isn’t just buyers feeling down about the housing market these days: the sour mood has spread to builders as well. Industry sentiment gauged by the National Association of Home Builders turned pessimistic in September after four months of neutral or optimistic readings, the trade group’s data show. Economists expect another pessimistic reading when the October result is released on Tuesday.
Investors in home builders have had a rocky run in recent weeks as Treasury yields and mortgage rates have risen. Two exchange-traded funds tracking the home builders and related industries, the
SPDR S&P Homebuilders
ETF (XHB) and the
iShares U.S. Home Construction
ETF (ITB), have fallen about 12% and 14% over the past six weeks, according to Dow Jones Market Data. The ETFs, which had a strong run earlier this year as prospective buyers turned to new homes amid a dearth of previously owned homes for sale, have both returned about 25% year to date.
Builder shares have underperformed in recent weeks, but rising mortgage rates weighing on buyer demand is nothing new. In a note last week titled, in part, “Looking to 2024, Deja Vu from 2H22?”
JPMorgan
analyst Michael Rehaut wrote that he sees further upside for the industry in 2024. Larger-cap builders’ earnings per share will grow by double digits, he wrote, in spite of headwinds such as the recent rise in interest rates and anticipated economic slowing.
“While not nearly approaching the same level of disruption due to today’s lesser move in rates, we see some level of comparison to 2H22, when the builders also pulled back amid similar (albeit more magnified) investor concerns ahead of ultimately a rebound in fundamentals and the stocks in 2023,” wrote Rehaut, who reiterated his Overweight ratings on
PulteGroup
(PHM),
Toll Brothers
(TOL),
Meritage Homes
(MTH) and
Taylor Morrison Home
(TMHC).
Write to Shaina Mishkin at shaina.mishkin@dowjones.com
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