Housing Market Seeing Renewed Affordability Headwinds, With Fed Hike Prospects Likely to Worsen Situation, RBC Says
The US housing market is facing renewed affordability pressures amid elevated mortgage rates and prices, with prospects of Federal Reserve monetary policy tightening likely to complicate the picture for relief in the near term, RBC Capital Markets said Thursday.Housing affordability has worsened to "the most stretched levels" since last year's spring, following a slight improvement seen earlier this year, RBC analyst Mike Dahl said in a note to clients.The brokerage estimates that the top 40 markets account for more than 80% of public builder sales, and almost all of those markets are "well worse" than their long-term average affordability levels. RBC defines affordability as the monthly payment for a median-priced existing home as a percentage of median income. Mortgage rates have risen back to around 6.9% recently, according to the note."While rates remain volatile, potential for renewed Fed rate hikes amid stubborn inflation trends complicate the picture for potential near-term relief," Dahl wrote.Separately, official data showed Thursday that US producer prices rose at the fastest pace in three months in August amid higher fuel costs.Markets are now pricing in a roughly 72% probability that the Fed will increase interest rates by 25 basis points next week, up from 61% Wednesday, according to the CME FedWatch tool. The remaining 28% odds point to another pause.All of the homebuilder stocks that RBC covers -- such as D.R. Horton (DHI), Lennar (LEN), KB Home (KBH), PulteGroup (PHM), Smith Douglas Homes (SDHC), and Toll Brothers (TOL) -- "are significantly more exposed to areas seeing stretched affordability," Dahl said Thursday. "Even the larger diversified builders score worse than the national average given relative concentrations in less favorable markets.""Meaningfully lower" rates are likely required now to restore affordability amid stickiness in home prices, according to RBC. While homebuilders' continued use of higher incentives allows them to remain competitive, they still face order and margin risks.Although new home conditions in the US are also "stretched," they continue to be more favorable on a relative basis as homebuilders continue to modify home sizes and prices and lean into rate buy-downs, according to the note."A continued lack of progress on affordability and ongoing confidence/rate headwinds could also further delay a recovery in existing home sales and home improvement spend," Dahl said. "We remain cautious overall, and expect continued volatility across our stocks."Last month, government data showed that new home sales in the US decreased more than projected in July even as median prices moved lower.Price: $135.08, Change: $-3.85, Percent Change: -2.77%
