Cooling housing market seeps into other sectors

John Matheson, a home inspector in Alameda, California, stayed busy during the pandemic as the real estate market was hot. But as interest rates began to rise around mid-2022, he noticed his workload began to decrease. Last year, this is the number of jobs filled.

“My business is about 50 percent of what it was,” said Mr. Matheson, who works as a contractor for BPG Inspections, which provides services to home buyers across the country. “As far as I’m concerned, it’s been a very bad year.”

So bad, in fact, that “I’m actually thinking about side hustles,” he said, adding that he was studying for a commercial captain’s license in hopes of getting a job operating a ferry or another vessel if the housing market does not permit it. bounce.

High house prices and high mortgage rates, which weighed on the housing market last year, dragged down a number of other related sectors, such as real estate services and mortgage lending. But housing is such a crucial cog in the U.S. economy that its slowdown also threatens industries like home improvement and storage.

“Existing home sales are under significant pressure,” said Sean O’Hara, president of fund management company Pacer ETFs. “We’re sort of coming out of a phase where real estate, across the board, had a great environment.”

Existing Home Saleswhich make up most of the nation’s housing stock, were down about 7% in November from a year earlier, according to the National Association of Realtors.

Federal Reserve policymakers kept interest rates steady at their December meeting and signaled that the central bank would begin cutting interest rates in 2024, offering hope to the more sensitive residential market to variations in interest rates.

The factors that kept people from buying a home in 2023 were countless, including soaring prices. THE median price of an existing single-family home stood at $392,100 in November, according to the Federal Reserve Bank of St. Louis, making home buying unaffordable for much of the population even as mortgage rates have fallen below 7 percent.

Potential buyers also face a lack of homes on the market. Some homeowners don’t want to sell their homes and give up the low mortgage rates they got just a few years ago. About four in five homeowners with a mortgage have a rate below 5 percent, and about a quarter have a rate below 3 percent, according to a study by online brokerage Redfin. Even baby boomers who might be considering downsizing are realizing that it may not be cost-effective to take out a new mortgage at rates at their current levels.

The contagion from last year’s slowdown in the real estate market was widespread.

Professionals like real estate agents and mortgage lenders are the most visible collateral damage, but other service providers – such as title insurance companies, escrow companies, appraisers and home inspectors – ​​are also seeing their activity dry up. Other once-hot markets are experiencing a similar evolution.

“Our best year in the business was 2021, during the height of Covid,” said Scott Patterson, owner of Trace Inspections, which offers home inspections in the Nashville area. “Then interest rates started to rise and people just stopped buying houses unless they really needed to.”

Mr Patterson said the combination of low inventory and high mortgage rates was slowing the number of home purchases, particularly among first-time buyers.

“The people most affected are those buying starter homes,” he said. “Interest rates are really hurting them. “They’re the ones we see less of.”

Businesses involved in moving and storing personal property are also facing a slowdown that executives attribute to falling home sales. On a call with analysts in August, Edward J. Shoen, U-Haul’s chairman and chief executive officer, blamed the contraction in moving activity on a drop in the company’s turnover in the first quarter.

Demand for storage units has exploded during the pandemic as people spend more time at home or take advantage of lower mortgage rates by purchasing a home. Developers have benefited, with investor funds fueling the construction of new storage facilities across the country.

“What you had during the pandemic and after the pandemic was just abundant supply,” said Michael Elliott, an equity analyst at CFRA Research.

As pandemic-related consumption patterns have declined, some businesses have struggled. In September, analysts at Morgan Stanley lowered their price target for Extra Space Storage and a Wells Fargo analyst issued a research note warning of general sector weakness.

Storage companies must choose between boosting occupancy by reducing rates or raising them to generate more revenue – or risk seeing their customers turn to competitors.

The owners renovated and redesigned during the pandemic, getting new recliners, refrigerators and big-screen TVs. Today, retailers face a challenging sales environment.

Demand for furniture, appliances and home electronics has faltered, according to a Bank of America analysis conducted in 2022. Fewer people buying homes has led to lower demand for big-ticket items like sofas and home stereo systems, said RJ Hottovy, analytical research manager. at the analytics company

So many people purchased home furnishings during the pandemic years that those purchases supplanted those that might otherwise have taken place today, further depressing demand. In early September, found that visits to home goods retailers were down about 15% from a year earlier, and visits to electronics stores were down 12%.

Young adults are a significant potential source of demand for these types of properties, experts say, given that they would normally be looking to buy a home to start a family.

“I think a lot of millennials, in particular, are looking to move to get a bigger house,” said Timothy S. Chubb, chief investment officer of wealth management firm Girard. “This has been relatively impossible to do, given the lack of inventory.”

This translates into lower spending on durable goods, he said.

Home improvement retailers face similar challenges. “Everything associated with moving isn’t happening, and that’s a lot,” said Scott Mushkin, founder and managing partner of R5 Capital, a consulting and research firm.

Home Depot executives told investors during a third quarter earnings call in November, Americans bought fewer big-ticket items. Lowes reported lower spending on DIY projects during the same quarter. Home improvement retailers typically take advantage of the fact that people who are unable to purchase a new home decide to renovate their current home instead. But consumers were less keen on major renovations in 2023 as rising interest rates increased the cost of borrowing.

Although the surge in home values ​​has given homeowners more equity on paper, accessing it has become more expensive.

“With the current state of the real estate market, people are not able to move,” said Mr. Elliott, an analyst with CFRA Research. “It’s going to have an impact on demand.”