There are plenty of takes out there regarding the US housing market from prices are high due to low supply to interest rates are the real problem, not prices. Many of the narratives are the same as they were a few years ago, however, the backdrop has changed significantly, particularly since the start of 2024.

There are plenty of takes out there regarding the US housing market from prices are high due to low supply to interest rates are the real problem, not prices. Many of the narratives are the same as they were a few years ago, however, the backdrop has changed significantly, particularly since the start of 2024. Before digging into economic data, let’s look at the technical picture for the State Street SPDR S&P Homebuilders ETF (XHB). XHB has a near-zero fund score and is trading at the same prices from the end of 2023. Since then, XHB has gained just 2.39% while the S&P 500 Index (SPX) has gained just over 60%. XHB has had a fund score below the acceptable 3.0 level since March. Despite some attempts to push higher last year, the fund was never able to regain the premier level of strength it had from late 2022 through 2024 where it held a near-perfect fund score from 2023 through most of 2024. On XHB’s 2-point chart, we can see the poor technical picture and the hefty resistance area that will be difficult to overcome. From a pure technical standpoint, it is a clear area to avoid for the time being.

Housing affordability has been at the forefront of public consciousness since the Covid-boom in housing prices. There are two primary aspects of housing affordability, home prices and mortgage rates. These two points are synthesized by the Salary to Afford a House data point which looks at the household income needed to afford a house at current home prices and mortgage rates. The calculation assumes that a household spends 30% of their gross income on their mortgage, tax, and insurance payment (Reventure.app). Salary to Afford a House is displayed in the table below, along with Median Household Income.

With data going back to January 2005, there have been three different regimes over the last twenty years. The housing bubble leading up to the GFC saw median household incomes unable to comfortably afford a house. Post-GFC until January 2022 was a period defined by more affordable housing in the US as prices had cooled off and interest rates remained low. Since the start of 2022, housing in the US would be classified as “expensive” with the salary to afford a house over 20% above median household income through present day. Interestingly, during these expensive housing market periods, homebuilders typically struggle when compared to the S&P 500 Index. Returns for XHB and the S&P 500 Index over the last three housing regimes since 2005 are also included in the image below.

While most people agree that housing is historically expensive, many argue that it’s expensive because supply is tight. This was assuredly the case from 2020-2024 as For Sale Inventory in the US in 2022 dropped from about 1,102,000 in February 2019 to 345,000 in February 2022, less than a third of what it was in 2019 and the low mark of For Sale Inventory. Furthermore, the three-month moving average for Home Sales as a Percentage of For Sale Inventory went above 100% as there was simply not enough For Sale Inventory to match demand at that time. The phenomenon crashed back to earth by early 2023 despite For Sale Inventory being historically tight as high prices stifled demand for homes. Both For Sale Inventory and Home Sales as a Percentage of For Sale Inventory are now back to pre-pandemic levels. While the lack of supply narrative was accurate a few years ago, supply is back to more normal levels. Secondly, inventory is trending towards higher levels. The combination of a historically expensive housing market, lackluster demand via home sales, and increasing supply, shows a clear imbalance in favor of supply in the US housing market in aggregate and will likely act as a headwind for housing related equities like homebuilders. On the bright side, year-over-year home value growth in the US has been below 2% since April 2024 and this bodes well for a cooling inflation picture if commodity prices can get under control.