Record existing-home sales … it’s a seller’s market … a bullish tailwind for homebuilding stocks … will it continue in 2021?
On Friday, we learned that U.S. existing-home sales just hit their highest level in 14 years.
Ultralow mortgage rates and remote work during the pandemic have fueled the surge in demand.
According to the National Association of Realtors (NAR), existing-home sales hit 6.76 million in December. That’s up 22% from a year ago.
***But this housing boom highlights a problem for homebuyers
Not enough housing inventory.
From The Wall Street Journal:
“Homeowners are smiling, because they are seeing price increases,” said Lawrence Yun, NAR’s chief economist. “It’s just lack of inventory that is holding back even greater home sales.” [ …]
There were 1.07 million homes for sale at the end of December, down 16.4% from November and down 23% from December 2019, according to NAR.
At the current sales pace, there was a 1.9-month supply of homes on the market at the end of December, a record low.
This record-low is driving up existing-home prices.
From CNBC:
Nationally, home prices rose a remarkable 8.4% in October from a year earlier on the S&P Case Shiller Index. That’s up from a 7% gain just the month before and is the largest one-month move in over a decade.
Traditionally more affordable markets are becoming less affordable as prices rise faster.
At the end of 2020, the median price of homes in just over half the counties in the nation (55%) was considered less affordable to the average wage earner than they have been historically, according to Attom Data Solutions. That is a significantly larger share than a year ago — pre-pandemic.
“These price gains are completely offsetting the benefit of lower mortgage rates and it takes even more to come up with a down payment which is a big deal for that 1st time buyer, less so for others,” said Peter Boockvar, managing director with Bleakley Advisory Group. “Another of the Fed’s unintended consequence of hurting those that are least able to afford it.”
On a personal note, I live in Los Angeles. One of my friends is currently looking to buy a home. He reports that it’s an incredibly hard market for buyers.
All offers are expected to come in over the asking price … if your offer isn’t all-cash, you’re at a major disadvantage since many other buyers will be making all-cash offers … and when you do make an offer, you’ll be competing with a double-digit number of competing would-be homeowners.
From the LA Times:
In recent months, the national and Southern California housing markets have been red hot. Bidding wars are common. Homes fly off the market in days.
In November, the regional median home price jumped 11%, while sales climbed 19%, according to DQNews.
Great for sellers. Terrible for buyers.
Back to Laurence Yun, from the NAR:
The frustration is coming from the first-time buyers who don’t have any housing equity and they’re trying to save up for a down payment.
Today’s market is unhealthy, people are making hurried decisions and prices are rising way above income growth.
My friend continues his months-long search without success.
***Where is new home construction in all of this?
You might be thinking, “so aren’t there any new homes being built to help take pressure off this housing shortage?”
Yes, there are — and it’s been fueling the homebuilder-stock boom we’ve been tracking here in the Digest for the last year.
From HousingWire:
Single-family housing starts ended 2020 on a high note, rising 12% in December to a 1.338 million unit pace — the highest pace since 2006, according to the Census Bureau.
That’s up 27.8% from one year ago, a remarkable figure given the economic effects of the COVID-19 pandemic, per industry officials …
An estimated 1.380 million housing units were started in 2020 — 7% percent above the 2019 figure of 1.29 million
***It was September 2019 that Matt McCall, editor of Investment Opportunities, was alerting his subscribers to this opportunity
From Matt:
Inventory, or the number of homes for sale, has been on the downswing for years (see the blue line on the chart below). A recent rollover on the chart suggests the amount of homes on the market will continue to fall.
At the same time, the number of U.S. housing starts (the orange line) has increased for the last decade.
The inverse relationship makes sense. As the number of homes for sale falls, homebuilders are incented to build new homes.
The result is higher revenue for homebuilders, leading to higher stock prices. This is precisely why housing stocks recently broke out to their best level in over a year.
Matt then touched on the decline in mortgage rates and pointed toward the investment implications:
Here’s the takeaway for us:
Over the last 10 years, when mortgage rates fall to this level and home inventories turn lower, investors make money in housing stocks.
***The bull market in homebuilders has just broken out of its holding pattern
To evaluate housing stocks, we can look at ITB, it’s the iShares US Home Construction ETF. It holds homebuilders and home improvement companies, including D.R. Horton, Lennar, Home Depot, Lowe’s, and Sherwin-Williams.
Since Matt’s issue on September 5, 2019, ITB has climbed 54% while the S&P is up just 31%.
But let’s zero in on what’s been happening with ITB since the second half of 2020.
As you can see from the chart above, housing stocks exploded out of the COVID-bear lows in March. However, after peaking in mid-October, they’ve been trading sideways.
Until this month …
Below, we show ITB’s chart again, this time highlighting the compressing wedge pattern it had been trading in until just a few weeks ago.
As you’ll see, it has now exploded out of this wedge, suggesting the beginning of a new, bullish run.
***What does the rest of 2021 look like for new home construction?
The market should stay strong for homebuilders. Yet, in the near-term, don’t be surprised if we see a slow-down from the current torrid pace.
Rising material costs and low land inventory would contribute to a slow-down.
Here’s the National Association of Home Builders:
Spikes in softwood lumber prices earlier in 2020 caused the price of an average new single-family home to increase by $16,148.
Lumber prices began drifting downward in the late fall, but appear to be on the rise yet again, likely due to reduced production heading into the typically slower building season of winter.
Despite this, look for the overall market to remain resilient this year.
Back to HousingWire:
… most industry experts believe construction rates will climb even higher in 2021.
“We expect single-family construction to move up 9% in 2021 — a much-needed relief valve for homebuyers,” said Danielle Hale, chief economist at Realtor.com.
“While buyer demand has slowed since December, it remains notably higher than one year ago, giving builders a strong incentive to keep building.” [ …]
“Supply-side headwinds will remain in 2021,” added Odeta Kushi, First American deputy chief economist. “Given the underbuilding that took place in the decade following the Great Recession, it will take years for builders to close the deficit.”
Put all of this together, and it appears there’s more bullishness in store for ITB and top-tier homebuilding stocks.
We’ll continue to keep you up to speed here in the Digest.
Have a good evening,
Jeff Remsburg
