May 28, 2025 | U.S. Value Equity
The Housing Market’s Next Move
Research Analyst
Something’s missing in the U.S. real estate market: existing home sales.
With current home sales at historical lows and mortgage rates hovering between 6% and 7%, homeowners who are locked into previously secured low-interest mortgages remain hesitant to sell. In fact, existing home sales have reached depressed levels unseen in three to four decades.
This is prompting many investors to ask whether the housing market is primed for a turnaround. While there continues to be uncertainty about when the next housing sales cycle will begin, we believe the potential for mean reversion and depressed valuations creates an interesting investment opportunity.
Why Housing May Be Poised for a Turnaround
Like the broader economy, housing markets operate in cycles, and today’s exceptionally low transaction volumes suggest potential for upside.
Unlike in other cyclical markets, however, life events—such as divorces, job changes, retirements, and deaths—inevitably drive home sales, ensuring that housing market activity eventually resumes, regardless of broader economic conditions. As a result, periods of suppressed home sales tend to be shorter than in other cyclical markets.
Another crucial element in housing cycles is mortgage rates. Currently, the spread between mortgage rates and the 10-year U.S. Treasury yield is near its widest in four decades, indicating potential for normalization. A narrowing of this spread, possibly triggered by reduced quantitative tightening from the U.S. Federal Reserve or policy adjustments addressing fiscal discipline, could significantly revive demand.
Compelling Investment Themes
Further supporting our outlook for the housing market are a few notable themes that arise when comparing publicly traded homebuilders to their smaller, private peers.
Some publicly traded homebuilders have remained well positioned to weather ongoing federal policy uncertainty, in our opinion.
Although builders initially showed resilience to higher interest rates in 2023 and early 2024, that resilience has faded over the past year as elevated rates have persisted. But some publicly traded homebuilders have remained well positioned to weather ongoing federal policy uncertainty, in our opinion. Their resilience stems from a focus on high-end housing, often purchased by affluent buyers who pay cash. These publicly traded homebuilders are also less likely than smaller regional homebuilders to be significantly affected by tariff- and immigration-related pressures due to their diversified lumber sourcing and more stringent recruiting processes.
In addition, strong balance sheets make many publicly traded homebuilders superior to smaller, private competitors, which tend to rely more heavily on the debt capital markets. This can be especially troublesome when higher interest rates persist.
It’s also important to note that while we have seen localized inventory increases in markets such as Texas and Florida, the overall supply remains historically tight. This could support pricing stability during a recovery.
Potential Winners and Losers in the Housing Market Shift
This anticipated shift in the housing market will likely not affect all segments equally. Clear distinctions emerge between those that may be positioned to benefit and those likely to struggle.
We believe homebuilders targeting the high-end market are poised to benefit significantly from improving market conditions. Notably, more than a quarter of one such company's buyers are cash buyers, reducing sensitivity to fluctuating mortgage rates.
We also see potential in home-related consumer stocks.
We also see potential in home-related consumer stocks. We believe these companies, which have faced suppressed valuations and earnings, could benefit directly from increased housing transactions, as new homeowners typically invest heavily in furnishings, appliances, and home products.
On the other hand, budget-friendly builders—such as those focusing primarily on entry-level housing—face continued pressures as lower-income buyers grapple with affordability challenges. Consequently, these builders could lag behind in any near-term recovery.
Conclusion
While the immediate outlook remains tight, we believe several long-term trends support the argument for a market recovery over time. Investors who want to strategically position themselves to capitalize on this eventual shift might look at small to midsize companies benefiting from increased transactions and stable demand, particularly those with exposure to high-end consumers and home-related products.
Gary Merwitz is a research analyst on William Blair’s U.S. value equity team.