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Topline
As home sales tumble to the lowest level in years a rash of industries tied to the housing market are starting to show signs of deterioration, with home builders, appliance-makers and some retailers among those likely to take the biggest hit as experts worry the downturn could spark a broader recession.
The housing risks for one retailer are “too big” to recommend investors buy shares, one analyst … [+] says.
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Key Facts
In a Tuesday report, Bank of America noted the rate of wire payments to escrow and title companies—typically used to pay deposits for home sales—have fallen this year for the first time since the Covid recession in mid-2020, according to consumer spending data, adding to mounting signs of a housing market slowdown.
The impact has perhaps been felt most by homebuilders, who in August declared the nation has fallen into a “housing recession” and have seen shares tumble more than 30% this year, according to the S&P Homebuilders Select Industry Index, which includes home-manufacturing giants such as Masco and Owens Corning; the broader S&P 500 has fallen 24%.
Bank of America notes the slowdown could also be a drag on consumer spending due to the impact on housing-related segments, most notably furniture spending, which has a “historically close” relationship with housing sales and has already fallen more than 10% year over year.
In past housing cycles, including the collapse that sparked the Great Recession more than a decade ago, furniture spending didn’t hit its low until a few months after home sales did, so Bank of America notes further weakness could still lie ahead.
Others susceptible to the decline include appliance-makers, in-home entertainment companies and consumer electronics firms including Best Buy, whose CEO last year pointed to the booming housing market as reason for better-than-expected sales on items like TVs and home theater setups.
Analysts aren’t yet convinced the housing-related fallout alone will trigger a recession, but the impact could be big: Harvard researchers have estimated the market’s effects have accounted for at least one quarter of the growth in personal consumption expenditures, which command a hefty 70% of the nation’s gross domestic product.
Surprising Fact
Though overall retail sales climbed in August, demand for items like furniture and electronics has fallen nearly 2% and 6% year over year—the only negative yearly changes among the types of businesses tracked by the Commerce Department, according to the latest data.
Contra
The one housing-related industry in which more consumers say they’ll spend more—instead of less—is home improvement, notes Bank of America. On Monday, R5 Capital analyst Scott Mushkin downgraded Lowe’s stock and said risks to the housing market are “too big” for him to recommend investors buy shares, but other analysts, including Atlantic Equities’ Sam Hudson, note the post-Covid environment bodes well for home-improvement firms, particularly since less Americans buying homes may mean more people are likely to invest in their existing property.
Key Background
The housing market continues to be one of the sectors hardest hit by the Fed’s rate hikes, and concerns the downturn could spark a recession have only intensified as a result. With mortgage applications plummeting to their lowest level since 1997, some analysts predict the plunging demand will spark a correction in home prices. On Tuesday, the International Monetary Fund said the “potential contagion effect” of such a correction would likely be “more limited than in previous recessions,” but it noted risks are emerging elsewhere in the housing sector, especially in the United States, where more firms have started playing a role in the securitized mortgage market.
Further Reading
Financial Services
