The housing market has hit the skids, with existing home sales dropping in 12 of the last 13 months and existing home prices peaking last June.
The surge of home prices during the height of the pandemic and the jump in mortgage rates since the Federal Reserve began raising interest rates last March dampened home demand.
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The 30-year fixed mortgage rate averaged 6.32% in the week ended Thursday, up from 4.67% a year ago, according to Freddie Mac.
Existing home prices fell 12% to $363,000 in February from $413,800 last June.
Don’t expect a rebound soon, say analysts from Moody’s Investors Service. “Likely increases in unemployment and a U.S. recession later this year will additionally pressure sales and prices,” they wrote in a report.
“After a surge in U.S. home prices through mid-2022, values have generally trended lower, with variations across markets.”
Moody’s Sees More Price Drops
Prices have slumped big-time in San Francisco, Seattle, Denver, Las Vegas, Phoenix, San Diego, Portland, and Austin, they note. But values have held up better in several Florida markets and some other Southeast states.
“On a national basis, we expect home prices to decline about 4% both in 2023 and in 2024,” the analysts said.
“Risks vary across different metros and market segments, with declines from peak values of 15% to 25% or more possible in some areas.” In addition, they expect new homes sales to drop about 20% this year.
The elevated levels of home prices and mortgage rates “will likely hurt demand for several years,” the analysts said. “Home purchase affordability has plummeted to the lowest in decades, as typical payments on new mortgages have soared.”
Only 21% of homes listed for sale last year were affordable for the typical U.S. household, according to real estate brokerage Redfin. “Affordable” means that a buyer’s monthly mortgage payment is 30% or less of the buyer’s income.
Morningstar’s Take on Toll Brothers
If you’re looking for housing stocks, one you might consider is Toll Brothers (TOL), a luxury home builder. Morningstar assigns the company no moat (durable competitive advantage) and puts fair value for the stock at $69. It recently traded at $60.30.
“Toll Brothers prides itself on controlling an ample supply of some of the best land in the industry,” Morningstar analyst Brian Bernard wrote in a commentary.
“Premier land inventory, combined with luxurious, customizable designs, allows the company to charge industry-leading average selling prices among [publicly-traded] peers.”
Bernard sees three factors boosting Toll Brothers:
- “Increased demand for entry-level homes could encourage established homeowners to sell their first homes in favor of new move-up homes.
- “The popularity of empty-nester homes and active-adult communities is increasing among baby boomers.
- “Growing household wealth should put the company's affordable luxury products in reach of younger households.”
