Housing decline likely to continue but some see hopeful signs ahead | CNN Business
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Mortgage rates have fallen recently, but they’re still up significantly from a year ago thanks to a rise in long-term bond yields as the Federal Reserve raises interest rates.
While this has already had a negative impact on the housing market, we’ll get more details this week about the extent of the damage.
Long list of housing data on tap. On Tuesday, the US Census Bureau will release housing starts and building permits numbers for November, followed by Friday’s release of new home sales data for the same month. In between will be current home sales numbers for November from the National Association of Realtors on Wednesday, as well as weekly data on mortgage rates and applications on Thursday.
Over the past few months, existing and new home sales have seen a steady decline due to the sharp rise in prices and the fact that home prices remain stubbornly high for first-time buyers. Housing starts and building permits were more volatile month over month, but those numbers are down from a year ago.
However, there are some promising signs that the worst may soon be over. Shares of Lennar (LEN), one of the largest homebuilders in the United States, rose after last week’s earnings announcement. Revenue beat expectations and the company’s guidance for the number of homes it expects to deliver next year was slightly above analyst estimates, too.
According to CFRA Research analyst Kenneth Lyon, Lennar investors “may be looking ahead to 2023, possibly crossing the valley from a recession to a potential recovery.”
There are others in the industry who are cautiously optimistic, too.
According to data from the Amherst Group, an investment firm that buys single-family homes to rent, it’s important to put the recent price slide in context.
Amherst said home prices are still about 40% higher than pre-pandemic levels. So, any further 15% drop would only bring them to mid-2021 levels. In other words, this is not like the real estate bubble bursting in the mid-2000s.
It should also be noted that the job market remains strong and wages are increasing. Moreover, many consumers still have decent levels of excess savings thanks to government stimulus in the era of the pandemic.
All of this amounts to a few good reasons why the housing market could avoid a severe and prolonged recession.
“The US housing market continues to be supported by a tight labor market, the lock-in effect of low fixed mortgage rates for existing homeowners, tight mortgage underwriting, low leverage in the mortgage sector, and low housing supply,” said Brandywine with fixed income. Analyst Tracy Chen in this month’s report.
Chen added: “We believe that we can avoid a sharp decline in the housing sector such as the downturn that occurred in the global financial crisis.”
Others point out that while home sales may remain weak because home prices are rising and mortgage rates are still high, the good news is that most current homeowners are still paying their monthly mortgage on time.
Again, this is a stark contrast to 2008 when many people with subprime mortgages or borrowers with poor credit histories were unable to keep up with their mortgage payments.
“Housing is not collapsing the economy. Yes, the housing market has taken a hit. Mortgage delinquencies remain low,” said Jane Goldman, chief investment officer at Cetera Investment Management.
Not many companies reported their latest earnings this week. But a few can give more clues about the financial health of consumers and the state of corporate spending.
Cereal giant General Mills (GIS) will report earnings on Tuesday. Analysts expect a slight increase in both sales and profits. Consumers may be growing concerned about inflation and the broader economy, but they’re still eating wheat. Shares of General Mills (GIS) are up about 30% this year.
Analysts are less optimistic about the prospects for sneaker king and Dow component Nike (NKE), used car retailer CarMax (KMX) and memory chip maker Micron (MU), whose semiconductors are used in devices ranging from cellphones and computers to cars.
The profits of these three companies are expected to decline. They wouldn’t be the only leaders of corporate America to report poor results.
According to data from FactSet, fourth-quarter earnings for S&P 500 companies are expected to decline 2.8% from a year ago. Analysts were busy lowering their forecasts, too. John Potters, chief earnings analyst at FactSet, noted in a report that fourth-quarter earnings are expected to have increased 3.7% as recently as Sept. 30.
Investors will also be paying close attention to what companies say in their earnings reports about their outlook for 2023. Analysts currently expect earnings growth of 5.3% for 2023. That could be overly optimistic…especially if companies start lowering their own forecasts due to concerns about the broader economy.
“The odds of a recession are very high,” said Vincent Reinhart, chief economist and macro strategist at Dreyfus & Mellon. This will have an indirect impact on corporate profits. Higher rates and weak earnings point to more pain for stocks.”
Monday: German IFO Business Climate Index
Tuesday: starting housing and building permits in the United States; China sets the main interest rate for the loan; interest rate decision from the Bank of Japan; Earnings from General Mills, Nike, FedEx (FDX) and BlackBerry (BB)
Wednesday: existing home sales in the United States; Germany Consumer Confidence Earnings from Rite Aid (RAD), Carnival (CCL), Cintas (CTAS), Toro (TTC) and Micron
Thursday: weekly unemployment claims in the United States; US GDP for the third quarter (third estimate); Profits from CarMax (KMX) and Paychex
Friday: US personal income and spending; PCE inflation in the United States; US new home sales; US durable goods orders; US Consumer Confidence from Michigan; Japan swells UK markets close early
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