Housing Market ‘Contagion’: Collapse Threatens Spillover Effects In These Major Industries

Housing Market ‘Contagion’: Collapse Threatens Spillover Effects In These Major Industries

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.

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 home builders, who in August declared that 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 that 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.

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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 that investors buy shares, but other analysts, including Atlantic Equities’ Sam Hudson, note the post-Covid environment bodes well for home-improvement firms, particularly since fewer 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 that 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

Mortgage Rates Drop For First Time In 6 Weeks—But Housing Market Downturn Could Last Several Years, Wells Fargo Warns (Forbes)

Housing Market Collapse Could Push Home Prices Down 20% In Major Markets Like Dallas And Los Angeles, Experts Predict (Forbes)

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