UBS analyst John Lovallo sees stability in interest rates as key. Better consumer confidence, he contends, is just as important as a more stable economy in coaxing a recovery from homebuilder stocks. He recently explained how these drivers underly deeply negative impacts on the housing market. This, in turn, affects the dispersion of homebuilder shares’ returns.
Lovallo added that rapid swings in interest rates have made a difficult landscape for home buyers, especially first-time buyers. With the cost of mortgages rising due to higher rates, many prospective buyers are being priced out of the market for homes. This trend puts downward pressure on homebuilder stocks as their demand starts to dry up.
Beyond interest rates, consumer confidence is really going to be the big kicker to how quickly the housing market rebounds, Lovallo noted. When consumers feel secure about their financial situations and the economy, they are more likely to invest in real estate. Alternatively, if consumers stay wary from economic turbulence, they might delay purchases, taking an even greater toll on homebuilder stocks.
The analyst further pointed out that persistent inflationary pressure might dampen consumers’ spending boost. As prices rise, households may prioritize essential goods over significant investments like housing, leading to a slowdown in sales for builders. Lovallo recommended that until inflation normalizes, homebuilders may still be in for some rough weather.
Lovallo emphasized the role of new construction starts in offering a shot in the arm to the housing market. Both putting more homes on the market, increased construction activity lowers prices indirectly by boosting supply even faster. First, this surge can help reduce inflationary pressures and restore confidence among consumers. Without a dramatic increase in the number of new projects, the market will be hard pressed to get back on its feet completely.
Lovallo’s insights are timely, as millions of investors have been keeping a sharp eye on the performance of homebuilder stocks recently. The sector has been a roller-coaster ride in recent months, causing investors to take a fresh look as the economy shifts beneath them.