Housing Industry Facing Several Issues

After almost ten years of tailwinds, the housing industry is facing some headwinds for the first time since the financial crisis and real estate collapse in 2007 to 2009. Several reports came out last week that are flashing warning signs for the housing market, but there is also a growing problem that isn’t reflected in the government reports.

First of all, the existing home sales report for June showed a 0.6% decline in month-over-month sales and May’s numbers were also adjusted lower. The spring time is generally viewed as the peak season for housing sales and seeing sales decline from month to month is a concern. The report also showed total sales were down 2.2% from the same period one year ago and year-over-year sales have declined for four straight months now.

It is also interesting that the median existing home price increased by 5.2% and is now at an all-time high of $276,900. The median existing home price has increased on a year-over-year basis for 76 straight months now.

In the meantime, new home sales fell by 5.3% on a month-over-month basis and the seasonally adjusted rate was 631,000. That reading was down from 666,000 in May. New home sales were also revised lower from the original reported level of 689,000.

What I found to be very interesting was the trend in new home prices. The chart below shows a three-month average for new home prices and compares it on a year-over-year basis. As you can see the trend is moving lower and has dipped in to negative territory for the first time in several years and is the most negative that it has been since 2011.

Putting all of this together, you have median existing home prices rising on a y/y basis for 76 straight months while the median new home price is declining on a y/y basis. Both existing home sales and new home sales are declining from last year and the numbers are getting revised lower. And all of this is happening as we are in the middle stage of a rate-hike cycle. All in all, that isn’t a good sign for the housing industry.

Worker Shortage Adding to Problems

The concern that I mentioned previously that isn’t covered in the June reports is a labor shortage. A recent Wall Street Journal article addressed the subject and it points to the fact that younger workers don’t seem to be interested in construction jobs and the length of time job postings remain online. The shortage is already a problem in California and in the Northeast.

According to the article, the percentage of construction workers that are 24 years old or younger has declined in 48 out of 50 states. The overall decline amounts to a decline of 30% nationally from 2005 to 2016.

The overall number of workers in the industry has also been declining. In 2005, there were 11.7 million workers and that number dropped to 10.8 million in 2010 and then to 10.2 million in 2016.

With fewer and fewer young workers in the industry, this could become a major problem for homebuilders as they will have to pay higher wages to attract workers and they are already facing rising costs in materials.

The struggles are reflected in the chart of the SPDR S&P Homebuilders ETF (NYSE: XHB). The ETF peaked at $47 in January and then tumbled over 18% to its low in May. The fund has had trouble regaining any upside momentum and it hasn’t been able to move back above the $42 level in the last four months.

For the sake of comparison, the XHB is down almost 15% from its peak in January. The S&P fell 10% from its January peak and it has recovered and is now only 2% below that January peak.

Given the issues facing the housing industry—falling sales, falling prices, rising costs, and a labor shortage, I look for the sector to lag the overall market in the coming quarters. If the issues persist, it could be a sign of bigger problems that are reflecting problems with the overall economy.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

2 comments

  1. How important do you think this trend is? And, do you think we are headed for another 2008 debacle?

    Also, you need a “feedback” section or at least the microscope symbol in the upper right hand corner of the home page. I want to subscribe but it was only offered BEFORE I had read the article, not after.

  2. While we aren’t at the lofty levels we saw back in 2006-2007 for home prices, I think this is a trend that needs monitoring. If demand and prices continue to fall, we could see another housing crisis.

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