The Housing Market's Dead-Cat Bounce

by Andrew Zatlin June 23, 2023 12:00 pm ET

The latest housing data just came out.

But it's not as positive as you might think.

Today, I'll explain why homebuilders are "trading down," and what it means for the U.S. consumer.

For a transcript of this video, see below. This transcript has been lightly edited for length and clarity.

The Housing Market's Dead-Cat Bounce

The latest housing data just came out, and at first glance, it's super positive.

Let me show you what I mean. Here's a 12-month snapshot of housing starts in May compared to April, up 20%:

That's a massive one-month jump. And building permits May versus April, were up 5%. That's an indication of future activity, all positive.

It's no wonder that the homebuilder sentiment is at an 11-month high. This is really important. Housing is about 30% of the U.S. economy. So if it's going up today and tomorrow, that's a really positive sign, right?

Well, not exactly. Because when I do a deep dive, I see a lot of negativity in the detail. Let me explain...

Zooming Out

First of all, let's take a look at this 12-month snapshot, but let's extend it to the broader trend. Here's a five-year snapshot...

Since last year, we have been in a steady downturn.

In fact, even after the recent 20% jump, homebuilding is down 10% compared to last year. We're barely back to pre-COVID levels.

The reason we're on a downtrend is pretty straightforward: The Federal Reserve has jacked up interest rates, moving mortgage rates higher, and supplies remain limited.

Housing Is Unaffordable

As a result, affordability has gone out the window.

Let's go back to the interest rates. Simply put, if you wanted to borrow a $250,000 mortgage two years ago, you'd make a $1,100 monthly payment. That same mortgage today is $1,700. That's a 50% jump. It makes housing unaffordable.

Consumers have had to respond in very simple ways. They've only got so much to spend, and as a result, they're spending less. That's showing up in the median price for homes. This is an 11-year snapshot showing the median price of homes:

It shot up during COVID, because let's face it, people don't care about the nominal price of a house. They care about what they have to pay each month in mortgage. And when rates collapsed, well, they could stretch that dollar that much further.

Then, the opposite happened. As you can see from the chart above, we've seen a dramatic, almost straight down drop in median home prices.

And that's because consumers can only offer so much for the same home. So prices have started to fall, but that's only one of the two reasons we're seeing a drop in median home prices...

Builders Downsize

Again, if there's only so much money to go around, the other part of the equation is how homebuilders are going to respond to that. Well, they're downsizing. Instead of building large, million-dollar houses, they're building condos and townhouses.

Let me show you in the data. This is a two-year snapshot of single family homes:

Down, down, down... And yet, look at the trend for multi-unit housing:

Up, up, up.

It's very straightforward. See what's happened with interest rates? What's happening with affordability? It's pushing consumers out of the market. At the same time, homebuilders are responding to that, and they're shifting. They're saying, "Fine, you can't afford these large houses, but you can afford these cheaper condos and townhouses."

And see, that's the real story. Consumer belt-tightening has been underway and it's getting worse. The total number of building units is up, yes, but we're building a lot of the cheaper ones.

That's because the consumer is under a lot of stress, and that's where we really want to focus. If the consumer is under stress, he's going to be spending less, and he's going to be spending in different ways.

If you're a Moneyball PRO subscriber, that's where I'm paying attention to, because I've got an idea that could generate 20%, 30%, even 50% returns.

The key point today: Housing is not doing well. It's showing a lot of strain at the consumer level, and you need to be cognizant of that.

We're in it to win it. Zatlin out.