Housing market cools as price growth hits slowest pace since Great Recession recovery

Cotality data show U.S. annual home-price growth slowed to 0.9% in December, the weakest pace since the post-Great Recession recovery, with sharp local declines in several Sunbelt and West Coast markets (Kahului-Wailuku -8.0%, Victoria, TX -7.4%, Wichita Falls, TX -7.2%, Napa, CA -7.1%). Florida had five of the biggest pullbacks (Naples -6.8%; Punta Gorda and Cape Coral -6.2% each), while strength was concentrated in smaller Midwestern and Plains metros (Youngstown, OH +15.9%; Terre Haute, IN +11.4%; Decatur, IL +10.5%). The report highlights rising inventories and moderating in-migration as drivers of regional weakness and notes that future direction will hinge on wage growth and buyers' purchasing power, implying uneven exposures for homebuilders, regional REITs and mortgage-related securities.

Analysis

Market structure: National annual house-price growth slowing to ~0.9% with local declines up to -8% (Hawaii, parts of Florida/Texas) reallocates pricing power from coastal/sunbelt spec builders to affordable-Midwest markets (Youngstown +15.9%, Terre Haute +11.4%). Winners: secondary-market landlords (single-family rental operators) and low-cost builders focused on Midwest; losers: speculative condo developers, Sunbelt lot speculators, mortgage originators reliant on refinance volumes. Cross-asset: expect wider agency MBS spreads, stress on regional-bank mortgage pipelines (KRE sensitivity) and transient downward pressure on CPI shelter component, which could steepen front-end real-rate moves and increase TLT/Treasury convexity demand.

Risk assessment: Tail risks include a Fed pivot +100bp cut within 6–12 months (would re-accelerate prices) or sudden immigration/in‑migration reversal supporting Sunbelt demand; regulatory risks include state-level property-tax reforms that materially change incentives (noticeable within 12–24 months). Immediate (days) risk is mortgage-rate volatility around jobs/CPI prints; short-term (weeks–months) is spring selling season reaction; long-term (quarters+) is inventory normalization and wage growth recovery. Hidden dependencies: local employment trends, builder backlog conversion rates, and investor-flip activity; catalysts are CPI/shelter prints, weekly mortgage applications, and 30-year fixed rate moves >50bp.

Trade implications: Tactical: short homebuilder exposure via XHB/ITB — use 3–6 month put spreads (buy 10–15% OTM, sell 5% OTM) sized 1–2% NAV; hedge with a long position in AMH (American Homes 4 Rent) 1–2% for exposure to Midwest rent growth. Credit/FX: buy 3–5% allocation to 10y Treasuries (TLT) conditional on 10y yield dropping 30–50bp within 3 months; reduce exposure to regional-bank ETF KRE by 25% vs XLF. Options: buy VNQ 3-month puts as tail hedges if REITs do not price in slowing rent growth.

Contrarian angles: Consensus overlooks micro-market divergence — some secondary metros show >10% upside, implying mispriced single‑family rental equities and local homebuilder names; the negative headline masks transaction-volume pick-up opportunities (title/settlement, brokers) if asking prices fall but inventory rises. Reaction may be overdone in national homebuilder ETFs; specific builders with low land exposure (PHM, DHI) could outperform — prefer stock selection over broad ETF exposure. Unintended consequence: downward pricing could trigger refinancing windows that temporarily boost originator revenue when rates fall, so keep event-driven optionality.

Key Decisions for Investors

• Establish a 1–2% NAV short position in ITB (iShares US Home Construction ETF) via 3–6 month put spreads: buy 12% OTM puts and sell 7% OTM puts to limit cost; monitor spring selling season (April–June) for unwind if new listings fall <10% YoY.
• Allocate 1–2% NAV long to AMH (American Homes 4 Rent) to capture rental-centrifuge demand in secondary markets; add if local rent-growth datapoints (BLS/Redfin rent indices) show >4% YoY over two consecutive months.
• Reduce regional bank exposure: trim KRE weighting by 25% vs XLF and redeploy proceeds into short-duration Treasuries (TLT or direct 7–10y) if 10y yield falls >30bp within 90 days; reassess if 30yr mortgage rate drops >50bp.
• Buy protective 3-month VNQ puts (or equivalent 5–10% notional) to hedge REIT downside; increase hedge if CPI shelter component prints >0.3% MoM or unemployment falls materially, which would alter Fed path.
• Monitor and research micro-market longs: screen for single-family rental and Midwest-focused small-cap builders (TERRE HAUTE/Youngstown exposure) and be prepared to deploy 1–3% NAV into selected names if local HPI >8% YoY persists for two months.