The Dow Jones broke a six-session losing streak in trading Tuesday, by advancing just over 200 points on the day. The Nasdaq led gainers among the major indexes with a 1.65% gain while the S&P 500 was up better than 1.1%.
The rally also contained some rare breadth on the day as the Russell 2000 was up just over 1.4%. May Durable Goods and June Consumer Confidence had prints above expectations, which help triggered a "risk-on" rise in the markets during the day.
Stocks of homebuilders, building materials, and other housing-related companies were some of the strongest performers Tuesday. This rally was triggered by stronger-than-expected increases in home prices in April.
New Home sales for May also were up some 20% on a year-over-year basis, which was much higher than the consensus was expecting. This was the highest level of new home sales since February 2022, just before the Federal Reserve began its current policy of aggressive monetary tightening.
Home prices and housing sector-related stocks have held up remarkably well given the average 30-year mortgage rate is currently near 7%, up from just over 3% at the beginning of 2022. The SPDR S&P Homebuilders ETF (XHB) has risen better than 25% so far in 2023 despite housing affordability being at its worse level since the mid-90s, which own own Bob Byrne details here.
I am currently underweighting the sector, however. I expect to take profits on what positions I have in this area over the next few months as my covered call positions in names such as Beazer Homes (BZH) expire in the money.
I most certainly would not be chasing housing stocks right now. It is important to remember a good part of housing prices being able to hold up is due to the lack of housing inventory over the past year.
People simply don't want to let go of their houses to a large extent. This makes perfect sense given how many homeowners are sitting on 3% 30-year mortgages. That makes the decision to sell one's house much tougher even if doing so would bring huge gains. Many are just sitting tight, but if mortgage rates get back down to 5%, I would expect a big jump in inventory hitting the market.
In addition, if company layoffs continue to accelerate, more houses will come on the market. On Wednesday we saw Ford (F) and Robinhood Markets (HOOD) announce more rounds of job cuts. Lordstown Motors (RIDE) also declared bankruptcy.
Restructuring efforts throughout the tech industry in 2023 is one of key reasons why Seattle and San Francisco are two of the weakest housing markets in the country. Both saw home prices drop in the low teens in May despite strength elsewhere in the country.
In addition, there's a reason I believe home prices haven't fallen as much as they probably should due to high mortgage rates. It's what I call the "Airbnb Effect."
In Palm Beach County, Fla., it seems that every fifth or sixth home on the market is listed as "a current Airbnb property" or would make "an excellent Airbnb investment." This spring I have noticed Airbnb prices seem to be substantially lower than they were at this time last year.
Real Money's James "Rev Shark" DePorre retweeted some data that showed Palm Beach County is not the only one seeing falling Airbnb prices Tuesday. As you see above, many top markets are seeing much lower rental prices for these accommodations.
I've been hearing quite a bit of anecdotal evidence about this. Some friends in Sevierville (Dollywood) have seen the bottom drop out of their rentals. https://t.co/UPsS35TbTr— James DePorre (@RevShark) June 27, 2023
If this continues, it will knock out another pillar supporting the housing market. That's also a key reason why I am currently short Airbnb (ABNB) and pessimistic on the overall housing market overall despite solid recent readings from the sector.