Housing stocks took a beating. Time to buy?

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Our theme of Housing stock, which includes stocks of homebuilders, building products companies and home improvement players, is down about 38% since the start of 2022, significantly underperforming the S&P 500, which remains in down about 20% over the same period. Now, the housing market has been very strong over the past two years, with the median June home listing price at $450,000, up 17% from a year ago, according to Realtor .com, but the tide could turn.

Mortgage rates have skyrocketed, with 30-year fixed mortgage rates dropping from an average of 3.1% in December 2021 to around 5.5% currently, making housing finance more expensive. Rates could rise further, with the Fed on track to raise benchmark rates again by 0.75% or possibly even 1% later this month, to combat soaring inflation . This could impact the demand for homes in the future. In addition, monetary tightening by the Fed is very likely to push the US economy into recession over the next few quarters, and a slowdown will almost certainly put pressure on the housing market. Separately, U.S. homebuilder confidence fell to its lowest level in two years in July as rising inflation and supply chain issues prompted many builders to stop building homes. .

While it is difficult to time an entry into the theme, housing market fundamentals appear stronger than in previous down cycles as housing remains significantly undersupplied in the United States. With the housing stock chart down nearly 38% this year, it seems like a lot of the pain ahead is priced in. In our theme, Floors and decorations has been the worst performer, with its stock having fallen around 43% since the start of the year. On another side, Pulte Groupan Atlanta-based residential home-builder has fared slightly better than the other names in the chart, with its stock down about 22% year-to-date.

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