Fortune released some data on Aug. 24 about the impending housing market crash. Over 183 housing markets in the U.S. could see home prices drop by 20% if a recession hits. If that happens, the worst stocks to hold at that point would be anything related to residential real estate, except for owners and builders of multi-family residential.
So, which housing-related industries will suffer more than others?
Real estate brokers would continue to be affected as higher mortgage rates reduce the number of sale transactions. If consumers shy away from buying newly constructed homes, home buyers could also feel the pinch, and of course, the businesses that supply home builders with the products necessary to build the homes could also be hurt.
Some are probably already feeling the heat.
With the Federal Reserve Chair saying on Aug. 26 that the Fed would have to raise interest rates higher for longer to dampen inflation, industries reliant on housing are all but certain to take a beating in the near term.
So, with that in mind, here are three of the worst stocks to own ahead of the potential housing market crash.
|Invesco Dynamic Building & Construction ETF
Toll Brothers (TOL)
You would think that the luxury market wouldn’t be hurt by rising interest rates. However, the usual buyers that Toll Brothers (NYSE:TOL) gets — it builds homes that sell for more than $1 million — have opted to sit tight. Many of its buyers are trading up from lower-priced homes.
According to Bloomberg Industries analyst Drew Reading, as reported by Bloomberg:
‘The move-up market will continue to face unique challenges as current homeowners are less inclined to trade up due to massive home-price gains and the likelihood they carry a significantly lower rate on their current mortgage,’ Reading said in an email. ‘The higher end of the market also tends to be more discretionary, which means ongoing volatility in the stock market could remain an overhang.’
Toll’s purchase contracts in the quarter ended July were 1,266, well below the 2,568 expected by analysts.
TOL stock is down 34% year-to-date. There’s a good chance it could fall further in the months ahead. I would wait for the situation to settle before buying on the dip.
Invesco Dynamic Building & Construction ETF (PKB)
PKB’s website states:
These are companies that are primarily engaged in providing construction and related engineering services for building and remodeling residential properties, commercial or industrial buildings, or working on large-scale infrastructure projects, such as highways, tunnels, bridges, dams, power lines, and airports.
Toll Brothers is not a holding but at least six large homebuilders including DR Horton (NYSE:DHI), one of the largest homebuilders in the country. The ETF is down more than 23% YTD.
Approximately 45% of the holdings are companies that provide machinery and materials for homebuilders.
Opendoor Technologies (OPEN)
This buyer and seller of homes has also gotten pummeled in 2020. Opendoor Technologies (NASDAQ:OPEN) has lost more than 69% of its value YTD.
Opendoor reported Q2 2022 results at the beginning of August. While its revenues increased 254% over last year to $4.2 billion, its gross margin fell 180 basis points to 11.6%. As a result, it lost $54 million in the quarter.
On the surface, those seem like pretty good numbers. However, if a recession hits and home prices fall by 20% in 183 markets, Opendoor will be losing money on a lot of homes. So, it’s understandable why OPEN stock is trading for less than $5.
It is now officially a penny stock.
Interestingly, analysts still like the stock. Of the 13 covering OPEN, eight rate it a “buy.” Only one has it as underweight or an outright “sell.” The average target price is $8.83.
In March, I suggested that for under $10, OPEN might be a good bet for aggressive investors. However, the housing market and interest rates have gotten much worse in the months since. At this point, only the most aggressive investors should consider making a bet on Opendoor.
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On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.