Hope in the Spring Housing Market Has Sprung a Leak

Artificial intelligence-related stocks were the key driver of the over 20% year-over-year earnings growth that has been delivered so far this first-quarter earnings season. Profits and revenues have exploded at those firms providing the "picks & shovels" for the AI Revolution. The stocks of these emerging juggernauts have been well rewarded. The shares of Micron Technology (MU) are over up 700% over the past year. The stock of Intel (INTC) doubled in April following blowout first-quarter numbers. The shares now trade just under 120-times forward earnings.

Outside the technology sector, things are not nearly so rosy. The Strait of Hormuz remains effectively closed, despite a ceasefire that largely has been adhered to by both sides. The blockage of this global choke point has triggered a huge surge of energy and commodity prices and will boost inflation in the coming months. There are few economic drivers right now with AI-related tech spending driving roughly 70% of the first quarter's 2% gross domestic product growth.

One of the many flailing parts of the economy is the housing sector. Existing home sales from 2023-2025 came in at their lowest levels since 1995, when the U.S. population was some 20% lower. It was hoped that when the Federal Reserve started to cut rates in September 2024, lower mortgage rates would help reignite the housing sector.

Unfortunately, this has not been the case. The yield on the 30-Year Treasury has moved up to roughly 5% from just over 4.1% in September 2024, despite Fed Chairman Jerome Powell reducing the Fed Funds rates by a cumulative 1.75 percentage point. The downside of running annual fiscal deficits in the $2 trillion range. While mortgage rates have come down some from recent highs, they are solidly over the 6% level. More than twice the level during the boom years following Covid when the Federal Reserve took rates down to near zero and boosted the money supply by 40% over two years.

This helped ignite massive asset inflation both in equities and in real estate values. As a result, housing affordability remains near historical lows. And this is important on a couple of key fronts. First, home building and housing related activity drives one sixth of the U.S. economy. Second, housing affordability is a key component of consumer sentiment, which currently is at the lowest levels since the University of Michigan began tracking this metric in 1978.

And unfortunately, 2026 is shaping up to be another moribund year for housing. The spring selling season appears to be a dud. Home sellers now outnumber home buyers by a whopping 630,000. This is the largest divergence since Redfin started to measure this back in 2013. Single family home inventory levels are at their highest levels in a decade, while condo supply hasn’t been at these levels since 2012.

Home builders are being forced to increasingly use incentives like mortgage rate buydowns and free upgrades to move burgeoning inventory. These incentives accounted for roughly 14% of home sale revenues at Lennar (LEN) in 2025. This obviously is a negative for profit margins and puts pressure on existing home sellers given they can’t offer these incentives.

I expect 2026 to continue to be miserable one for home builders and for housing activity to continue to be a drag on the U.S. economy. Of note, Beazer Homes (BZH) just rejected all-cash offer from Dream Finders Homes (DFH) this week. We will see if this leads to an enhanced offer in the weeks ahead. One thing I do expect to see given the current market backdrop, is more consolidation across this fragmenting industry.

If that is the case, some smaller builders like LGI Homes, Inc. (LGIH) could find themselves acquired. That said, I continue to avoid home builders and housing-related names within my portfolio. The housing sector will eventually recover, but not until housing affordability improves markedly. And this simply is not in the cards here in 2026.

At the time of publication, Jensen had no position in any security mentioned.