A Shaky Foundation

The Covid-19 pandemic brought forth a surge in demand for residential real estate. People stuck at home rethought their living-space needs, and near-zero benchmark interest rates dragged down the cost of mortgages. The U.S. housing market set records left and right as prices surged.

Now, there's a meaningful chill entering the market, writes Shaina Mishkin in Barron's latest cover story, as interest rates have climbed and buyers have balked at elevated asking prices.

Shaina writes:

The U.S. housing market has left its pandemic frenzy in the rearview mirror. This year through mid-November, the 30-year mortgage has seen its largest percentage-point gain since 1972, the first full year that Freddie Mac started collecting the data, according to Dow Jones Market Data. 

The Federal Reserve’s fight against inflation means the days of sky-high bidding wars, low mortgage rates, and rapid home-price appreciation are gone. Home sales in the U.S. are projected to end the year at 5.8 million—a 16% slide from 2021’s multiyear high, according to the average estimate from four government data sources and housing trade groups. The drop will continue into 2023, with home sales expected to slide a further 13%, to 5.1 million.

Fannie Mae, which buys mortgages from loan originators, expects home prices to drop below year-ago levels next year, according to its most recent forecast. In 2023, home prices tracked by its index will end 1.5% lower than the fourth quarter of this year, Fannie Mae estimates.

Looking farther ahead, long-term trends are still on the bullish side. Members of the Millennial generation—the largest since the Baby Boomers—are aging into their home-buying years. And a structural deficit of housing in the U.S. since the Global Financial Crisis means limited supply.

That makes home-building stocks attractive today, despite the gloomy near-term outlook, Barron's Andrew Bary writes in a sidebar to the cover story.

First of all, the stocks are beaten up and cheap: home builders D.R. Horton, Lennar, PulteGroup, and Toll Brothers all trade for single-digit multiples of next year's expected earnings and have lost more than 20% this year.

"Much of the bad news—and little of the potential good—looks priced into housing stocks, and waiting for fundamentals to improve might mean waiting too long," Andrew writes. "After all, investors look forward. Housing stocks fell earlier this year ahead of housing-market weakness, and they might now be anticipating better times by late 2023."

He calls out several promising stocks in the space, including some makers of appliances and building products that are exposed to repair and remodeling demand, not just new home construction. Those could be less risky near-term picks.

Check out Andrew's report on housing-related stocks here. And read the rest of Shaina's cover story here.