Housing Market: High Prices, Rising Inventory, and Challenges for Homebuilders
The U.S. housing market continues to face significant challenges. For several years, the conversation has centered on two major issues: high home prices and elevated mortgage rates. While these concerns remain, the underlying housing market has changed considerably since the beginning of 2024.
Homebuilders Have Struggled to Keep Pace with the Broader Market
One way to evaluate the health of the housing market is to examine the performance of homebuilding companies.
Since the end of 2023, the Homebuilders Index, which tracks companies involved in residential construction and related industries, has gained just 2.39%. During that same period, the S&P 500 Index has risen more than 60%.
Nasdaq Dorsey Wright technical analysis also points to continued weakness in the homebuilding sector. The Homebuilder Index Fund Score, which measures its technical strength, has remained below our preferred minimum of 3.0 since March and is currently near zero.
This represents a significant change from 2023 and much of 2024, when homebuilders demonstrated considerable strength. Additionally, the sector faces substantial technical resistance that could make a sustained recovery difficult.
For now, analysis from Nasdaq Dorsey Wright suggests that the homebuilding sector remains an area of the market where caution is warranted.
Source: Nasdaq Dorsey Wright
Housing Affordability Remains a Major Obstacle
Housing affordability depends primarily on two factors: the price of a home and the cost of financing it.
One useful measure is the annual household income required to comfortably afford a home, assuming mortgage payments, property taxes, and insurance consume no more than 30% of gross household income.
Looking back over the past two decades, the housing market has experienced three distinct periods:
- 2005 – 2008: Housing became increasingly unaffordable leading up to the financial crisis.
- 2009 – 2021: Lower home prices following the financial crisis, combined with historically low mortgage rates, made homeownership more affordable.
- 2022 – Present: Rapidly rising home prices and higher mortgage rates have pushed housing costs well beyond what many households can comfortably afford.
Since early 2022, the income needed to purchase a typical home has generally exceeded the median household income by more than 20%.
Historically, periods of poor housing affordability have also tended to coincide with weaker performance from the homebuilding sector relative to the broader stock market.
Source: Nasdaq Dorsey Wright
The Housing Shortage Is No Longer the Entire Story
For several years, a shortage of available homes was one of the primary reasons housing prices climbed so rapidly.
In February 2019, approximately 1.1 million homes were listed for sale nationwide. By February 2022, that number had fallen to just 345,000, a decline of nearly 70%.
With so few homes available, buyers competed aggressively for properties, driving prices higher
However, the situation has changed.
The number of homes available for sale has recovered to approximately pre-pandemic levels and continues to trend higher. At the same time, home sales have slowed considerably as elevated prices and mortgage rates have discouraged potential buyers.
In other words, the housing market is shifting away from a shortage of available homes toward a market where affordability is limiting demand.
This is an important distinction. Even as more homes become available, many prospective buyers simply cannot afford to purchase them at current prices and financing costs.
What Does This Mean for Homebuilders and Inflation?
The combination of historically expensive homes, slower sales, and increasing inventory creates a challenging environment for homebuilders.
Unless affordability improves meaningfully, these conditions could continue to weigh on homebuilding companies and other housing-related investments.
There is, however, a potential positive development.
Annual home value appreciation has remained below 2% since April 2024, suggesting that the rapid price increases experienced earlier in the decade have moderated considerably.
Slower home price growth could eventually help improve affordability and contribute to easing inflation pressures, although the impact on reported inflation will depend on rental costs, shelter inflation measures, and other economic factors.
Our Perspective
The housing market today looks considerably different from the market of just a few years ago.
Previously, the primary challenge was a shortage of homes. Today, the bigger obstacle appears to be affordability, with high prices and borrowing costs keeping many potential buyers on the sidelines even as inventory increases.
From an investment standpoint, the continued weakness in the homebuilding sector reinforces our cautious outlook for the sector.
While improving affordability and lower mortgage rates could eventually provide support, we would prefer to see stronger demand and improving technical indicators before becoming more constructive on the homebuilding sector.
As always, we will continue monitoring these developments and evaluating opportunities based on the relative strength of different areas of the market.
Source: Nasdaq Dorsey Wright
Below is the most recent D.A.L.I. (Dynamic Asset Level Investing) Indicator showing Domestic Equities and International Equities battling for the top spot, while Cash and Fixed Income remain far behind.
Source: Nasdaq Dorsey Wright
The current reading for the PR4050 Cash Trigger is: U.S. Equity Core = 99.30% & Money Market = 19.72%. For the PR4050 indicator to trigger and alert us when we should consider moving to cash, U.S. Equity Core must be 40% or below and Money Market must be 50% or above.
Source: Nasdaq Dorsey Wright
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