--- title: Housing Recession....What it Means and What it Means for Residential REITs description: The long-awaited slowdown in the housing market may finally be upon us, but maybe not. We might just be witnessing a reset in expectations. image: https://blog.armadaetfs.com/hubfs/Businessman%20looking%20at%20road%20with%20maze%20and%20solution%20concept.jpeg --- [![armada-etf-advisors-1_web](https://blog.armadaetfs.com/hs-fs/hubfs/armada-etf-advisors-1_web.png?width=200&height=43&name=armada-etf-advisors-1_web.png)](https://www.armadaetfs.com/) - [HOME](https://www.armadaetfs.com/) - [HAUS](https://www.armadaetfs.com/haus) - [INSIGHTS](https://blog.armadaetfs.com) - [VIDEOS](https://www.armadaetfs.com/videos/) - [TEAM](https://www.armadaetfs.com/team/) - [CONTACT](https://www.armadaetfs.com/contact) Residential REITs # Housing Recession....What it Means and What it Means for Residential REITs The long-awaited slowdown in the housing market may finally be upon us, but maybe not. We might just be witnessing a reset in expectations. [Al Otero](https://blog.armadaetfs.com/author/al-otero) Aug 31, 2022 --- ### ![Businessman looking at road with maze and solution concept](https://blog.armadaetfs.com/hs-fs/hubfs/Businessman%20looking%20at%20road%20with%20maze%20and%20solution%20concept.jpeg?width=1000&name=Businessman%20looking%20at%20road%20with%20maze%20and%20solution%20concept.jpeg) ### **Potential Slowdown In The Housing Market** The long-awaited slowdown in the housing market may finally be upon us, but maybe not. We might just be witnessing a reset in expectations that provides the foundation for continued vibrancy. There are no doubting several important data points which have turned negative in recent months, and these data points primarily relate to the speed of existing home sales and new home sales (home prices continue to move higher, but at a decelerating rate of growth). Any casual observer of the homebuilding industry need to look no further than publicly traded homebuilders' stock prices to get a sense of the desperation that has enveloped this industry over the past year. Homebuilders at their core are manufacturers and like other manufacturing industries, have suffered in recent quarters from rising input costs (land, materials, labor), supply chain woes and deteriorating margins. The Evercore ISI Homebuilders Survey has fallen nineteen of the last twenty-three weeks after hitting its high for the year in March. The survey notes that aside from mortgage rates, stock market declines and overall economic uncertainty, builders are seeing less urgency on the part of buyers to transact as they await a dip in prices.\[1\] ### **A Contraction In Builder Confidence** The notion of a “housing recession” began to dominate headlines several weeks ago with the release of builder confidence numbers (NAHB) which fell in July for the eighth straight month and monthly home sales data (NAR) which declined for a sixth straight month in July. The contraction in builder confidence and sales activity led industry leaders to declare a housing recession, though they do take pains to note that this is not meant to imply a recession in home prices or a pending housing depression which triggered the global financial crisis I(GFC) in 2008. Supply and demand imbalances in the housing market are supportive of home prices and even with higher interest rates and lower overall affordability for homeownership, supply remains tight and consumers are looking to buy homes.\[2\] ### **Current Housing Market VS 2008 Housing Market** While some may try and draw parallels between now and 2008’s housing crisis, the differences far outweigh the similarities with one of the main distinctions being the health of owner households and the strength of the job market. Home inventory levels have ticked up a bit in recent months but remain at low levels. A recent article by Housing Wire references that home sale listings are currently below 1.0 million, after bottoming in the 800k range, but substantially below the normalized level of 2.0-2.5 million.\[3\] One relevant corollary to the 2008 crisis is that the U.S. housing market never experienced the rebound in supply that was needed to meet the eventual rebound in demand. The resulting housing deficit exacerbated the sharp acceleration in home values associated with the post-pandemic home purchase binge. As the country slowly reopened in 2021 and the population adjusted to life in the aftermath of a global pandemic, a herd mentality took hold within the housing market and FOMO (fear of missing out) drove households to pay up for the privilege of homeownership to an extend never quite seen before. This phenomenon has been compounded by an unprecedented level of mobility for the U.S. workforce as hybrid work and work-from-home became more common place. ### **Residual Effects Of Pandemic On Housing Market** The pullback in new home sales and existing home sales reported for July, down nearly 30% and 19%, respectively from the prior year, is a direct manifestation of the evolving dynamics in the housing market following the pandemic. We believe that this “pause” in transaction activity on the part of households represents a reset and period of price discovery for buyers as they assess risks to the broader economic environment and the high level of price appreciation which has occurred over the past 12-18 months. It is important to note that while home values have largely moved higher over the past several months, we have seen a deceleration in the growth rate. A recent Redfin analysis of multiple listing data (MLS) shows that year over year home price appreciation was largely in the 5-8% range from 2014-2020, and jumped to a peak of over 25% in July of 2021. The growth rate for July of 2022 was 7.7%, right in line with the five-year period leading up to the pandemic.\[4\] ### **Home Price Appreciation Begins To Diminish** We strongly believe that the underpinnings of the housing market remain solid. The historic uptick in home price appreciation over the past 12 months has begun to moderate as a result of rising interest rates, rising inflation and the expectation that while jobs and wages remain quite strong, they could backtrack as U.S. economic growth slows and possibly transitions into a mild recession for several quarters. With the economy at an inflection point, it is not surprising to see a widening of spreads (difference between asking and offering prices) between buyers and sellers of homes with sellers trying to extrapolate ever higher prices based on the recent past, while buyers are pushing back and discounting existing prices in light of the potential for weaker conditions in the future. In fact, a very similar exercise is also unfolding across the residential rental market where transaction activity has come to a temporary pause as well with buyers and sellers reassessing future valuations. True to form, the underlying fundamentals for rental housing have also been remarkably strong over the past year for most of the same reasons as for-sale housing. Rent growth for rental housing and residential REITs will moderate in coming quarters as current levels of growth are unsustainable and unhealthy for the long-term wellbeing of both tenants and landlords. ### **Beyond The Headlines** As we move towards the final quarter of 2022, it is possible that negative rhetoric on the housing market could intensify and we would caution residential REIT investors to look beyond the housing headlines and realize that strong fundamentals including occupancy levels, rent growth, high resident retention rates, operating expense management and reasonable rent-to-income levels will all contribute to a constructive outlook for 2023. Footnotes: \[1\] Evercore ISI: Homebuilders Survey, August 23, 2022 \[2\] Mortgage News: Signs of Change Afoot In Housing Market; Jon Reed (August 2022) \[3\] Housing Wire: Are We In A Recession (August 2022) \[4\] RedFin News: July Home Sales Dropped %…..; By Dana Anderson (August 22, 2022) *Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (800) 693- 8288 or visit our website at www.armadaetfs.com. Read the prospectus or summary prospectus carefully before investing.* Investments involve risk. Principal loss is possible Distributed by Foreside Fund Services, LLC. [Residential REITs](https://blog.armadaetfs.com/tag/residential-reits) ## Similar posts REIT ### [“Measuring ETF Liquidity”](https://blog.armadaetfs.com/measuring-etf-liquidity) We believe the alpha potential over the long term may make up for the spread of the lower-volume ETFs. Al Otero Aug 25, 2022 Singe Family Rental ### [Who Can Thrive With A Housing Reset?.......Single-Family Rental](https://blog.armadaetfs.com/who-can-thrive-with-a-housing-reset.......single-family-rental) It is our view that a reset in the for-sale housing market will lead to “stronger for longer” fundamentals in single family rentals. Al Otero Aug 25, 2022 REIT ### [Residential REITs in A World of Change](https://blog.armadaetfs.com/residential-reits-in-a-world-of-change) 2022 by most accounts was a “historic” year for the rental housing industry in which the stars aligned and owner/operators benefited immensely from a... 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Unlike mutual funds, ETFs may trade at a premium or discount to their net asset value. Brokerage commissions may apply and would reduce returns. The fund is new and has limited operating history to judge. **Risks of Investing in the Funds:** The Funds are classified as non-diversified investment companies. The Funds may invest a greater portion of assets in the securities of a single issuer or a smaller number of issuers than if they were diversified funds. To the extent that either Fund invests in other funds, a shareholder will bear two layers of asset-based expenses, which could reduce returns compared to a direct investment in the underlying funds. Through investments in REITs, the Funds are subject to the risks of investing in the real estate market, including decreases in property revenues, increases in interest rates, increases in property taxes and operating expenses, legal and regulatory changes, a lack of credit or capital, defaults by borrowers or tenants, environmental problems, and natural disasters. The Fund smay invest in derivatives, which are often more volatile than other investments and may magnify the Funds’ gains or losses. The HAUS Fund may invest in debt securities which are subject to the risks of an issuer’s inability to meet its obligations under the security; failure of an issuer or borrower to pay principal and interest when due; and interest rate changes affect the prices of fixed income securities. In addition, an increase in prevailing interest rates typically causes the value of existing fixed income securities to fall and often has a greater impact on longer duration and/or higher quality fixed income securities. The PRVT Fund invests in mortgage-backed securities (MBS), which are subject to the risks generally associated with fixed-income securities and mortgage-backed securities. Delinquencies and defaults by borrowers in payments on the underlying mortgages, and the related losses, are affected by general economic conditions, the borrower's equity in the mortgaged property, and the borrower's financial circumstances. In addition, an increase in prevailing interest rates typically causes the value of existing fixed income securities to fall and often has a greater impact on longer duration and/or higher quality fixed income securities. Unlike typical exchange-traded funds, there are no indexes that the Funds attempt to track or replicate. Thus, the ability of the Funds to achieve their respective objective will depend on the effectiveness of the portfolio manager. In general, ETFs can be tax efficient. ETFs are subject to capital gains tax and taxation of dividend income. However, ETFs are structured in such a manner that taxes are generally minimized for the holder of the ETF. An ETF manager accommodates investment inflows and outflows by creating or redeeming “creation units,” which are baskets of assets. As a result, the investor usually is not exposed to capital gains on any individual security in the underlying portfolio. However, capital gains tax may be incurred by the investor after the ETF is sold. The Fund is recently organized, giving prospective investors a limited track record on which to base their investment decision. Investment Objective: The Home Appreciation U.S. REIT ETF (HAUS) seeks total return. For current holdings and performance click [here](https://www.armadaetfs.com/haus/). Investment Objective: The Private Real Estate Strategy via Liquid REITs ETF (PRVT) seeks total return. For current holdings and performance click [here](http://www.armadaetfs.com/prvt/). Distributed by Foreside Fund Services, LLC. Foreside is not affiliated with Armada ETF Advisors, Tidal ETF Services or Thryve Communications. Launch & Structure Partner: Tidal ETF Services. Website by Thryve Communications. © 2021 Kalungi, Inc. - All Rights Reserved. [Powered by Atlas - a B2B SaaS HubSpot theme](https://www.kalungi.com/atlas-hubspot-theme-for-b2b-saas-software)