Wild West Standoff Set To Hit Stock Market

A wild west standoff is taking place right now in the housing market. Take southeast Florida as a prime example of the divide between buyers and sellers. In upscale Boca Raton, the median price of homes sold in many communities sits far below the listing prices of homes on sale.

Yet sellers are standing firm on price, and in the process paying ongoing carrying costs, which are substantial, a combination of mortgage costs, taxes, insurance, and perhaps even HOA fees.

It’s clear that buyers are not willing to go up but sellers won’t come down, and the result is inventory rates are rising and time on markets is rising. So what is it sellers are not taking account of and how is this going to affect the stock market as a whole?

Key Points

• Mortgage application volumes are at 1995 levels, yet home sellers are not conceding on price declines just yet.
• The slowdown in home purchases has an impact on lending institutions which are likely to report lower numbers.
• So too are new home sales related to consumer spending on furniture and appliances, which are likely to slow too.

Wild West Standoff

Sellers appear to be looking in the rearview mirror at past sales and across the road at neighbors who sold during the real estate run-up from 2020-2022.  But in summer of 2022, the market stalled and it seems sellers aren’t acknowledging the triumvirate of costs facing buyers.

Buyers aren’t just faced with paying higher prices but higher interest rates and taxes too. Take this shocking statistic as an example of the high costs facing buyers. A median 5-bedroom home in Boca Raton stands at $2,100,000 now which translates to around $35,000 per share in taxes alone. Buyers just 3 years ago were paying materially lower prices at substantially lower rates as well as paying much lower taxes.

So, it seems sellers are paying attention to the totality of those costs but focused primarily just on selling price. They are not accepting the reality buyers face whereby they must pay significantly higher taxes ad infinitum, even after paying off their mortgages. And their ongoing monthly payments for the duration of the loan are much higher than what buyers from a few years ago are saddled with.

While southeast Florida is by no means representative of the entire country, the reality is mortgage applications are now at 1995 levels, and that has a material effect on economic activity. Here’s how it is likely to affect the stock market.

How Slowing Home Sales Hurts The Stock Market

As mortgage application volumes plunge, so too is there a domino effect on lending institutions who are undoubtedly earning less because origination fees and loan servicing income is falling. Lower application volumes reduce this income, potentially affecting their profitability and stock prices.

The reduced number of mortgage applications also negatively impacts construction firms, as well those in the business of building materials, real estate, furniture, and home improvement. Stocks in these sectors are likely to see slower demand and investment, leading to lower prices.

So too is consumer spending, which makes up about 70% of the economy, likely to see a material slowdown because home purchases are linked to increased spending on furniture, appliances, and renovations.

A weak housing market contributes to a broader economic slowdown, impacting various industries and lead to a decline in the overall stock market.

The bottom line is the slowdown in the housing market is likely to trickle through to the stock market over time as companies exposed to it report lower revenues and earnings. Expect earnings surprises in those enterprises to surprise to the downside in 2024.