Currently, you don’t need much convincing to adopt the bearish position on NVR (NYSE:NVR). As one of America’s leading homebuilders with an emphasis on the hard-hit eastern region of the U.S., you can find other investments that have a fundamentally more palatable profile than NVR stock.
For one thing, the novel coronavirus has completely disrupted the global economy. As we sludge through a frustrating recovery clouded by legitimate fears and uncertainty, the probability of a V-shaped economic recovery becomes increasingly distant. Back home, the Bureau of Labor Statistics disclosed horrifying statistics: total non-farm payroll employment dropped by 20.5 million, translating to a 14.7% unemployment rate.
Frankly, these are Great Depression-era figures. Obviously, this doesn’t help the case for NVR stock in the slightest.
To no one’s surprise, economic downturns cause a massive reduction in consumption and a spike in personal savings. Whatever expenditures are made are mostly toward essential goods and services. The recent jump in the stocks of Kroger (NYSE:KR) and Clorox (NYSE:CLX) provide real-time confirmation. If you need additional indicators, simply look at the record-breaking lines forming at food banks across the nation.
Beyond that, the true ugliness is likely not yet represented in the government statistics. However, it’s not all bad news for NVR stock. That’s because a pandemic sparked this economic crisis. Subsequently, this circumstance has caused many Americans to rethink city living. Therefore, many people have decided to take the plunge and move out to the suburbs.
Well, that benefits NVR stock because the underlying company specializes in suburban and countryside homes. If you’re in the real estate business, this is the subsegment you want to be in. But is it enough?
Demographics a Double-Edged Sword for NVR Stock
On one hand, the homebuilder is aligned with powerful demographic trends. Prior to this crisis, millennials have already been eyeing the suburbs and the quiet, family life. Naturally, the Covid-19 pandemic will only push this trend more aggressively, especially for those on the fence.
That’s especially powerful for NVR because millennials are the relevant generation. Not only are they younger, but they represent the largest workforce in the U.S. Theoretically, the company should experience a lift in revenue for this segment.
Plus, you shouldn’t ignore the impact from other homebuyer demographics. Interestingly, the coronavirus reimagined the concept of work. Companies quickly realized that they don’t need to have employees tethered to a physical location. This should allow other demos more freedom to explore suburban or countryside living, which again benefits NVR stock.
But the challenge is that this demographic tailwind is also a headwind. According to the BLS jobs report, not all Americans suffered similar magnitudes of distress at the coronavirus’ onset. Specifically, Hispanic households have been the most devastated, followed by Black households. We’re talking employment rates of 18.9% and 16.7%, respectively.
Of course, these stats are problematic for several sociological and political reasons. But from an economic standpoint, the coronavirus may stunt the outsized gains that communities of color made following the Great Recession.
According to the U.S. Census Bureau, homeownership rates for Hispanics and Blacks increased nearly 8% and 6%, respectively, between the first quarter of 2016 and Q1 2020. Whites saw a 2.2% lift while Asians increased rates by 6.1% during the same period.
In my view, without a holistic recovery across major demos, the housing market will not return to normal anytime soon. And that’s an ugly, underappreciated risk against NVR stock.
A Politically Sensitive Time
Now, you can look at these demographic numbers agnostically and take a very cynical position. White households are the least affected (for now) in this crisis because they tend to work in higher-paying positions that are compatible with remote-work platforms. Therefore, NVR could be a contrarian pick.
It’s possible this thesis could play out. However, the Census Bureau clearly states that all communities of color have outpaced White home ownership rates in recent years. That’s a huge chunk of growth that home builders can’t simply ignore.
Moreover, this is patently a politically unpalatable situation. If our new normal consists of the majority populace overtly dominating communities of color, that is not going to end well. I’m sure that even the Trump administration recognizes this.
But to get to a recovery that benefits all Americans will take time. Therefore, I’m in no hurry to gamble on NVR stock.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.