Low demand and increasing supply dampens both home prices and builders.
Housing affordability has been at the forefront of US economic talks over the last few years following the boom in housing prices since 2020. However, we are starting to see the aftermath of unaffordable housing prices in the US. National housing supply has trended higher over the last few years and is now back to pre-2020 levels. At the same time, demand for homes has collapsed with home sales materially below where they were before 2022. Higher interest rates and prices have had a clear impact on sales since 2022, but tight supply helped prices to continue to advance in 2023 and 2024. As supply has returned to more normal levels and home sales remaining in the doldrums, home value growth has stagnated over the last year and is flat year-over-year. The chart below highlights the increase in supply and dampened demand, impacting home value growth. The natural recurse for this would be lower home prices until demand lines up better with supply. While we haven’t seen that yet on a national level, certain markets are feeling some pain, particularly in states like Florida, Arizona, Texas, and California which have all seen their home value growth over the last year fall by more than 2% (Reventure).
A first order impact of a slowing housing market would be on the performance of homebuilders. One of the biggest names in the space, Lennar Corporation (LEN), announced poor fourth quarter results this morning while the stock was already down more than 13% this year. Looking at the homebuilder sector via the iShares U.S. Home Construction ETF (ITB), the technical picture isn’t much better than LEN. ITB has a poor fund score of 1.97 and trades about 20% from all-time highs. It will be interesting to watch this macro development play out, especially due to shelter’s large contribution to CPI data which will influence Fed decisions as we head into 2026. Nonetheless, real estate adjacent equities like homebuilders are in a poor spot from both technical and fundamental standpoints.
