Taking Stock Of The Housing Slowdown (2/3)

• The slowdown in housing activity described in part 1 of this post has clearly hurt homebuilders. The NAHB housing market index fell below its key break-even measure of 50 in August for the first time since Apr-May’20 depths of the pandemic and prior to that at lows since May’14, with a similar story in buyer traffic whilst one-in-five home builders reported a median 5% price reduction to “increase sales or limit cancellations”.
• Consistent with this has been a slide in the S&P 500 homebuilder price index, falling more than 25% from December whilst the price-to-book ratio has fallen from 2.3 to 1.5 over the same period as rates have ripped higher. Interestingly, the latter is still above levels reached through the aforementioned 2018/19 housing slowdown which considering how much larger the declines in sales/starts have been so far could see further downward valuation adjustments ahead.
• However, whilst we’re seeing “a housing recession in terms of declining home sales and home building” in the words of the NAR Chief Economist, “it's not a recession in home prices”. A large part of that is down to tight inventory: it’s improving – unsold inventory has increased to 3.3 months of supply vs 2.6 in Jul’21, 3.0 in Jul’20 – but it’s still historically low and has helped support strong price growth. That could partly explain the relative resilience in homebuilder price-to-book ratios in recent months despite sales /starts cranking lower and also has implications for household wealth.

Fig 2: Homebuilder Outlook and House Prices & Supply