According to the U.S. Census Bureau, new single‐family home sales dramatically slumped in May 2024. The negative ripple effects could be a warning sign for housing-linked stocks. The latest report on housing throws cold water on any ongoing optimism of what had been a resilient housing market. The data reveals that new home sales in the United States dipped to a seasonally adjusted annual rate of 619,000 in May 2024. This represents an 11.3% decline from the prior month and a worrisome 16.5% decrease compared to May 2023.
Rising Costs, Falling Demand
Due to the drop in new home sales, a concerning new reality for the housing market could lie ahead. Several factors, including the usual suspects related to housing, are likely culprits in this downward trend.
First are the rising mortgage rates. Next is this year’s compounding inflation, which diminishes affordability for potential homebuyers. Another one is the lack of entry-level homes being constructed, which has reduced the number of options for many in the category.
Overall, these combined ingredients are leading to a slowdown in demand, which poses a challenge for home builders and new housing-linked businesses.
The Ripple Effect on Housing-Linked Companies
While home builders are on the front lines of this slowdown, nothing in economics happens in a vacuum, so the impact extends far beyond builders. For example, the decrease in new home sales can be expected to trigger a ripple effect throughout the housing ecosystem. Suppliers of building materials, such as lumber and roofing manufacturers, can experience a decline in demand as construction projects slow down. Sales of durable goods like refrigerators and washing machines may experience its own slowdown. This can lead to production cuts, reduced profits, potential job losses, and lower stock valuations within these industries.
Real Estate Agents and Related Services
The cooling housing market also throws a curveball at the real estate agents and related service providers. Fewer homes being sold means real estate agents would grapple with a potential commission decline. Similarly, mortgage lenders might see a decrease in loan applications as fewer people purchase new homes. Title companies and home inspectors, who rely on the businesses generated by real estate transactions, can also experience a slowdown in activity. As with any slumping sector, the peripheral businesses are not immune from the contagion.
Key Takeaway
Investors in companies tied to the housing market should be aware of the potential risks associated with a decline in new home sales. Homebuilders, building material suppliers, real estate agents, mortgage lenders, and related service providers could all face headwinds in a weaker housing market. While a short-term dip might not be catastrophic, a sustained slowdown could lead to lower profits and even an impact on stock prices. In conclusion, the businesses doing well when new home sales were booming should be viewed with caution if new single-family home sales continue their slump.
