The Housing Market’s Next Move - William Blair

Existing home sales are at historic lows due to high mortgage rates locking in homeowners, but William Blair believes this presents an investment opportunity as housing market cycles, driven by life events, suggest a potential turnaround. They highlight the wide spread between mortgage rates and Treasury yields as ripe for normalization, potentially spurred by Fed policy changes. Publicly traded homebuilders focused on high-end housing and home-related consumer stocks are positioned to benefit, while budget-friendly builders may lag; overall, tight supply supports pricing stability during a recovery.

Analysis

The U.S. real estate market is currently characterized by historically low existing home sales, a situation attributed to homeowners' reluctance to sell due to being locked into low-interest mortgages amidst current rates hovering between 6% and 7%. This has suppressed transaction volumes to levels unseen in three to four decades. Despite this, the potential for mean reversion in housing market cycles, which are inevitably driven by life events such as divorces and job changes, suggests an eventual resumption of activity. A key indicator supporting a potential turnaround is the current spread between mortgage rates and the 10-year U.S. Treasury yield, which is near its widest in four decades, signaling potential for normalization; a narrowing, possibly due to reduced quantitative tightening or fiscal policy adjustments, could significantly revive demand. Certain publicly traded homebuilders, particularly those focused on high-end housing often purchased by cash buyers, are deemed well-positioned due to their resilience against interest rate pressures, diversified lumber sourcing, stringent recruiting, and strong balance sheets compared to smaller, private competitors more reliant on debt capital markets. While localized inventory increases are noted in markets like Texas and Florida, the overall housing supply remains historically tight, which could support pricing stability during a recovery. Home-related consumer stocks, currently facing suppressed valuations, also present an opportunity as increased housing transactions typically spur investment in home goods.

Key Decisions for Investors

• Investors should consider opportunities in publicly traded homebuilders targeting the high-end market, as these are positioned to benefit from affluent cash buyers and possess stronger financial footing.
• Evaluate home-related consumer stocks, which may experience a rebound in earnings and valuations as housing transaction volumes recover and new homeowners invest in furnishings and appliances.
• Exercise caution with builders focused on entry-level housing, as affordability challenges for lower-income buyers may cause these segments to lag in a near-term market recovery.
• Monitor the spread between mortgage rates and the 10-year U.S. Treasury yield, as a narrowing could signal an inflection point for housing demand and broader market activity.
• Focus on small to midsize companies with exposure to high-end consumers and home-related products that could benefit from increased transactions and stable demand in an eventual market shift.