2023 Housing Market May Be Different Than Expected

On December 20th, the Commerce Department released data showing that housing prices remain high, renter demand is still strong, and the supply and demand imbalance appears to show no relief.

These economic data points indicate that the housing crash, or pull-back many expected to see with housing prices in 2023, may not be coming.

Let's look at the numbers and then explain why a housing crash doesn't appear to be on the horizon in 2023.

The December housing numbers showed US single-family homebuilding dropped to a two-and-a-half-year low in November 2022. Permits also fell in November by 7.1% for single-family homes and 11.2% for overall building permits. Overall housing 'starts' dropped 0.5% in November, with single-family starts falling 4.1% and multi-family units up 4.8%.

So essentially, we are seeing that construction of new single-family homes is slowing when we are already in a tight supply-demand situation with those types of units. This supply shortfall comes from data showing that from June 2012 to 2021, the US had 12.3 million new households formed, but only 7 million new single-family homes were built.

The pandemic played a role in making this shortfall wider, as it is estimated that in 2019 the US was only short 3.84 million units. But, labor shortages before the pandemic started, which worsened during the pandemic, and costs of materials and land, all pushed housing prices higher.

Higher housing prices make it harder for more people to afford a home. Thus, fewer homes get built. High housing prices were likely one reason we didn't see more homes built in 2021. In 2022, the main reason was increasing interest rates. Again, higher interest rates push the overall cost of ownership higher, resulting in fewer people building homes.

Another interesting data point from December was the Homebuilders' confidence levels also plummeted in December for a record 12th month straight. This data point only adds to the idea that single-family homes will continue to be underbuilt in the near future.

Remember, there are two sides to the equation of new home builds. First, the consumer decides they want a new home built and hires a contractor to build the house 'custom'. The other way is a build track style homebuilder, which builds a bunch of homes in anticipation of consumers wanting to buy a new home.

If the home builders are confident they can sell what they build, they build before they have buyers. If their confidence is low, as it is now, they wait until they have a buyer who has already put money down before they build.

This matters because if the big home builders built up inventory now, while sales were slow, we could see that 5 million home shortfall begin to shrink. But if they don't build above the last ten-year average rate, how will we claw back some of that supply shortfall?

With all of that said, my takeaway from the December housing numbers is this; in 2023, we will not see a massive drop in housing prices. Yes, we may continue to see low demand because interest rates are high, but prices will not take an enormous hit. Low supply and high costs of materials will keep housing prices at or near current levels in most US markets.

So as an investor, here are a few Exchange Traded Funds that you can buy and hold for the next few years as we watch the housing market work through these interesting times.

The first is the Residential REIT Income ETF (HAUS). HAUS buys REITS that generate 75% of their revenue from multi-family or single-family rental housing or at least 50% from senior living housing. HAUS does have a high expense ratio of 0.60%, but considering it is an actively managed fund offering exposure to roughly 25 different REITS, that is not a terrible price.

Another ETF option similar to HAUS is the Kelly Residential & Apartment Real Estate ETF (RESI). It has an expense ratio of 0.68% and focuses on the residential and apartment real estate sector. However, unlike HAUS, which is focused on US-based companies, RESI focuses on any company operating in developed countries. RESI's goal is to have a portfolio of roughly 60 companies. A little more than double HAUS.

Another option is something like the Hoya Capital Housing ETF (HOMZ). HOMZ tracks a tier-weighted index of the top 100 equities representing the US residential housing industry. The fund is built on four segments; 1) home ownership and rental operations, 2) home building and construction, 3) home improvement and furnishings, and 4) home financing, technology & services. HOMZ is much broader than the other two but also focuses slightly less on the residential and rental portion of the housing industry, and more on the other business's that benefit from increased supply.

As an investor, you need to remember that predictions that the housing market will stay strong in 2023 and prices will not dip dramatically are just predictions and could be wrong. But I still believe investing some money in this sector is a wise move over the long run, even if 2023 doesn't play out the way I think it could.

Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.