Hold off buying battered housing stocks as there's more pain to come, star analyst Ivy Zelman says

Published Mon, Jul 18 20224:48 PM EDT

The plunge in homebuilder sentiment is a signal of a housing slowdown that's just beginning, according to star housing expert Ivy Zelman. Builder sentiment dropped 12 points to 55 in July, according to a Monday report from the National Association of Home Builders. The slump brought the index to its lowest point since the beginning of the pandemic. "The rate of change is pretty dramatic, and I think we're just in early innings," Zelman said Monday on CNBC's " Closing Bell ." Deterioration in the housing market started in May and has continued through July, though the impact is more severe in some areas than others, the CEO Zelman & Associates said. As the trend continues, home prices will have to continue to decline, she said. Because this trend is set to continue, now is not the time to snap up homebuilding shares, even if they look like they're trading at a relative discount. The S & P 500 real estate sector is down nearly 22% year-to-date, but could fall further. "I think that we're not seeing enough pain yet – I don't think that it's time to start accumulating here in terms of the homebuilding shares," said Zelman. "I think that we've got more capitulation that has to come to fruition." The high inflation environment that the U.S. is dealing with will continue to add pressure to housing stocks, as the Federal Reserve's raising interest rates pushes up mortgages and slows down demand as inventories are rising. "These stocks don't work when the Fed's raising rates and we know that that inflationary pressure that we're feeling is not going away anytime in the near term," she said. Zelman expects the overall downturn in housing to last until at least 2023 or 2024 and thinks that both new and existing home prices will decline. "This could be a one- to two-year correction, if not longer, depending on the economy," she said. That will lead to better opportunities to pick up stocks. Of course, some homebuilders have gained in recent weeks – for example, Cavco Industries has surged more than 18% over the last month, while MDC Holdings has jumped more than 25%. Zelman sees this as a chance to sell before they buckle. "I'd be taking profits and selling into that strength," she said.