Harvard Calls It: Housing Market Slowdown Will Hurt Renovation Boom

The Trump bump has faded, and the real estate market is expected to soften into 2019.

The annual growth in national home improvement and repair spending by Americans is expected to slow in 2019, according to the Leading Indicator of Remodeling Activity (LIRA) released Thursday by the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University.

The LIRA project seems to be ringing the proverbial bell on the US real estate market, indicating year-over-year increases in residential remodeling expenditures will peak at 7.7% this year and then start a downward trajectory through the second half 2019.

Chris Herbert, managing director of the Joint Centers for Housing Studies, explained that remodeling activity remains above trend, but due to rising interest rates and waning existing home sales, the renovation boom could be constructing a top.

"Rising mortgage interest rates and flat home sales activity around much of the country are expected to pinch otherwise strong growth in homeowner remodeling spending moving forward," said Herbert. "Low for-sale inventories are presenting a headwind because home sales tend to spur investments in remodeling and repair both before a sale and in the years following."

Last month, Bank of America warned existing home sales have peaked, reflecting declining affordability, greater price reductions, and deteriorating housing sentiment.

Chief economist Michelle Meyer, said that "the housing market is no longer a tailwind for the economy but rather a headwind."

BofA economist, John Lovallo became even more bearish on US real estate last week. He downgraded homebuilder stocks Toll Brothers, PulteGroup, and NVR and lowered his homebuilding estimates for 2018 and 2019.

"This morning BofA Merrill Lynch's US economic team lowered its 2018-2019 housing starts and new home sales forecasts and thus we slightly temper our macro housing assumptions," Lovallo said in a note Thur.

Analysts at Credit Suisse also downgraded homebuilding stocks, along with Home Depot and Lowe's, due to higher interest rates hurting housing demand.

Homebuilders have been under pressure in Oct. The SPDR S&P Homebuilders ETF is down more than -23% YTD. This collapse in price coincides with a surge in interest rates. The 10-year note yield hit its highest level since 2011 earlier this month, and if 3.21 continues to violate, then yields risk higher highs.

Reuters News - Homebuilders down for three days in a row

  • Shares of U.S. homebuilders continued their fall on the third consecutive day after BAML downgrades weak housing data earlier this week

  • D.R. Horton, KB Home, PulteGroup, M/I Homes, Lennar and Toll Brothers fell between 2pct and 3.2 pct

  • PHLX housing index .HGX down 1 pct

  • Analyst expect rising interest rates to temper some demand and affect housing affordability in U.S., weighing on earnings of homebuilders

  • BofA Merrill Lynch said Thur. U.S. housing recovery will be driven by entry-level and first-time buyers

  • Weak housing data Wed. showed homebuilding dropped more-than-expected in Sept., while building permits fell to a near 1.5 yr low

  • Separately, on Thur., Toll Brothers founder Robert Toll stepped down as executive chairman; Toll to remain a member of the board

  • PHLX housing index .HGX fell 25.9 pct YTD

With housing peaking - if Harvard, BofA and Credit Suisse are all correct - the real estate market could be in for a whirlwind of trouble next year; something the Trump administration cannot afford into the next presidential election.

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