If you’ll excuse the pandering to the SEO algorithm overlords, investors must start seriously considering the impact of interest rates on housing stocks to avoid. Basically, all eyes center on the Federal Reserve. While the June jobs report saw the headline employment print run lower than expected, certain nuanced details – such as declining unemployment and robust wage growth – demonstrate that inflation remains a problem.
Unfortunately, this framework implies that the Fed must get a bit more aggressive. Following a pause in June, many analysts believe that the central bank will raise rates later this month. If so, the hawkish Fed rate hikes would likely have a negative impact on housing market trends. Sure, these trends have been positive so far but that’s likely because the labor market has been so resilient.
Start chipping away this armor and financial market predictions may start shifting in the negative direction. Keep in mind that as of the first quarter of 2023, U.S. household debt collectively hit a record $17.05 trillion. And while mortgage balances grew modestly in Q1, the nominal tally exceeded $12 trillion. So, if the labor market were to suffer, these are the housing stocks to avoid.
Zillow (Z, ZG)
On the surface level, technology-oriented real estate marketplace company Zillow (NASDAQ:Z, NASDAQ:ZG) doesn’t seem a candidate for housing stocks to avoid. Posting a year-to-date performance of almost 60% up, the class C Z stock appears on the move. Also, in the trailing 365 days, shares swung up more than 57%. So far, so good until you realize that in Feb. 2021, the weekly average price of Z stood at just under $200.
Now at under $54, that’s quite a drop. And while Z may have earlier benefited from short-squeeze interest and other forms of speculation, as the Fed tackles inflation, the fundamentals will start to matter. Specifically, if policymakers take the gloves off, we may see a deadly combo of higher rates and rising unemployment. Do note that layoffs soared last year when the Fed began its rate hike campaign.
Put another way, gentle disinflation may be out the door. Another sign regarding the impact of interest rates on housing stocks centers on Zillow’s growth trend or lack thereof. On a per-share basis, the company’s three-year revenue growth rate now sits at 15.3% below zero.
Opendoor Technologies (OPEN)
One of the early proponents of the iBuyer business model – essentially using artificial intelligence to make instant offers on homes – Opendoor Technologies (NASDAQ:OPEN) initially flourished during the early part of the Covid-19 pandemic. However, when higher rates killed homebuying sentiment last year, OPEN crumbled, easily making it one of the housing stocks to avoid. Still, the underlying company wants to press ahead.
Despite competitors like Zillow abandoning the idea of tech-driven home flipping, Opendoor CEO Carrie Wheeler remains committed to the model. I admire the head exec’s tenacity and commitment. However, Fed rate hikes will almost surely impose negative housing market trends. And it will likely be particularly painful for iBuyers because they will lack the sense of urgency.
Back in 2021, the marketing pitch was, buy now or home prices will rise even higher. Today, with borrowing costs already elevated, you might as well wait to see if home prices will fade. With layoffs sure to rise, Opendoor may even lose some of its addressable markets. And that’s a problem because it’s not a profitable business.
D.R. Horton (DHI)
At the moment, circumstances appear quite swell for homebuilding giant D.R. Horton (NYSE:DHI). Since the beginning of this year, DHI gained over 41% of its equity value. In the trailing 365 days, DHI skyrocketed to over 76%. Given the combination of a strong labor market along with seemingly everyone screaming for more housing inventory, D.R. Horton apparently suffers from “good” problems.
However, in the longer term, I’d classify DHI as one of the housing stocks to avoid. Irrespective of various financial market predictions, the reality is that the homebuilder appears to be a leading indicator of brewing fundamental concerns.
Number one, its day’s inventory count increased conspicuously by 7% year-over-year in Q1 2023. Number two, revenue of $7.97 billion in the most recent quarter came in at 0.3% below the year-ago level. While it’s not time to sound the alarm, the trend is clear: supply is rising while demand is declining.
Plus, DHI trades at a forward multiple of 12.06, higher than 70.27% of its peers. You’re not getting a discount and you might incur red ink if you buy in now. Therefore, I’d be cautious.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.