The housing market has been in a rut for several years and recent data aren’t encouraging.
Transactions continue to fall. Existing-home sales slid 1.9% in April from March and the same amount from a year earlier, according to the National Association of Retailers.
The near-term outlook doesn’t look any better. Pending home sales, based on contracts signed but not yet closed, fell 7.7% in April from March and 7.4% from a year earlier, according to NAR.
"The impact of escalating interest rates throughout April dampened home buying, even with more inventory in the market," said NAR Chief Economist Lawrence Yun. The 10-year Treasury yield rose to 4.69% April 30 from 4.21% at the end of March.
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Higher interest rates depress housing demand by making mortgages more expensive.
The yield has since descended to 4.25% on June 13 amid expectations of Federal Reserve interest-rate cuts this year. Interest-rate futures point to a 70% probability of at least two rate cuts by year-end.
And that should be good for the housing market, experts say. "The Federal Reserve's anticipated rate cut later this year should lead to better conditions, with improved affordability and more supply," Yun argued.
When he made those comments on May 30, many investors expected only one rate reduction.
Affordability issues hit potential homebuyers
Affordability is certainly an issue now, with 30-year mortgage rates at almost 7% and home prices continuing to rise.
Existing-home prices climbed 5.7% in the 12 months through April, to $407,600 from $385,800 a year earlier, NAR said. The latest figure set a record for the month of April going back to at least 1999.
Ascending prices make it increasingly difficult for lower- and even middle-income Americans to buy homes, Robert Frick, economist at Navy Federal Credit Union, told Bloomberg.
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“The only real relief to the situation will come from the Fed cutting rates later this year, which will eventually filter through to mortgage rates.”
One expert looking for Fed rate reductions in 2024 is Chris Versace, lead manager for TheStreet Pro Portfolio. He noted investors’ anticipation of two rate cuts this year (up from one last week) after news this week that inflation was easing.
Fed officials have a median forecast of one rate cut this year, but that forecast, released June 12, may not have incorporated the latest price data.
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In any case, the Fed’s median forecast calls for five rate cuts over the next six quarters, Versace pointed out. “The [stock] market is going to see that benefiting interest-rate-sensitive parts of the economy, including housing.”
Fund manager targets Builders FirstSource
To take advantage of that dynamic, he bought shares in Builders FirstSource (BLDR) , which makes and supplies housing materials. It has a market capitalization of $18 billion.
Versace's price target for the stock is $205, 27% higher than Builders FirstSource's closing price on June 13.
Initially, Versace's position represents 1.3% of TheStreet Pro's portfolio. Typically, Versace establishes a position and then adds to it over time, capping the weighting at roughly 3% to 4% of total assets.
“We are selecting BLDR as a play on that because of its arms-merchant status with all the major homebuilders and key regional ones as well,” he said.
An arms-merchant business model means selling products to the combatants in the war (homebuilders in this case) rather than forming an army (building homes) yourself.
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“Builder’s strategy of growing its dollar content with homebuilders as they look to modularize and outsource more of their production is one we’ve seen be successful across other industries,” Versace said.
This “allows companies using that strategy to drive revenue and earnings growth faster than the industry.”
What’s the risk of buying Builders FirstSource stock? The economy slows more than expected, depressing housing demand.
But Fed Chairman Jerome Powell said on June 12 that he and his colleagues don’t want something to break for it to start cutting rates, Versace noted. That “suggests the central bank is mindful about extending the economic cycle.”
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