This year has proven to be quite challenging for home builders in the United States, and unfortunately, there seems to be no relief in sight.
If it weren't for the surge in artificial intelligence and significant government deficits, I suspect the overall economic landscape in the US would mirror the struggles seen in the housing sector.
The industry continues to grapple with the aftermath of the ultra-low interest rates that were prevalent during the COVID-19 pandemic. Early in the year, there was a glimmer of hope for a recovery, but that optimism quickly faded. The home builders’ exchange-traded fund (ETF), symbolized by $XHB, illustrates this narrative perfectly. It experienced a tumultuous start to the year, coinciding with the initial phase of the Liberation Day trade. While it attempted a comeback in April, it stumbled again as the year drew to a close, ultimately finishing slightly lower.
Notably, the performance chart of home builders may not tell the whole story. Higher-end builders have fared somewhat better, reflecting a divergence within the broader US economy. According to the latest sentiment index from the National Association of Home Builders (NAHB), which stands at 39, we are nearing historically low levels of builder confidence.
Throughout the year, there were moments when hopes for reduced interest rates boosted builder sentiment. However, we now find ourselves in a phase of disillusionment. Although some rate cuts are anticipated for next year, there is growing concern that these reductions may not significantly impact long-term interest rates and might even lead to a steepening of the yield curve.
Most American home buyers rely on 30-year fixed-rate mortgages, limiting the Federal Reserve's ability to influence the market through short-term interest rates. Even in a best-case scenario where the former administration’s plans for quantitative easing materialize, the prospects for lowering long-term yields appear bleak. This situation leaves us with few options to significantly invigorate the housing market.
In a twist of irony, recent economic data reveals a slight uptick in pending home sales, which rose by 3.3%, exceeding the anticipated increase of 1.0%. This indicates that there is latent demand in the market, which could eventually surface, potentially triggered by consumer expectations of rising interest rates.
Today, we also await another significant housing indicator: the Case-Shiller home price index, along with price figures from the Federal Housing Administration (FHA). Predictions suggest an increase of 1.2% year-over-year for Case-Shiller and a 1.7% rise for the FHA numbers.
Additionally, today’s economic calendar includes the Dallas Fed's services sector survey, known for its insightful commentary, and the minutes from the Federal Open Market Committee (FOMC) meeting held on December 9-10. These minutes could sway the market, particularly if they provide clarity on the timeline for prospective rate cuts, which has been one of the more controversial discussions in recent years.
Beyond the data releases, expect market movements to fluctuate as today marks the last full trading day of the year. Currently, S&P 500 futures are showing little movement.
