2020 was supposed to be a banner year for housing before the coronavirus locked buyers inside. But pent-up demand is hitting the market, and it appears more gains are coming
There’s a housing boom picking up steam, and investors would be wise to take notice.
Yesterday, we learned that homebuyer mortgage demand has spiked to an 11-year high, as rates have fallen to another record low.
New home mortgage applications climbed 4% last week from the previous week. According to the Mortgage Bankers Association, that puts them a remarkable 21% higher than a year ago.
But here’s what’s even more remarkable …
Despite the economic damage from the coronavirus, this mortgage application growth marks the ninth consecutive week of gains and the highest volume in more than 11 years.
It gets better …
On Tuesday, a report from housing data company, BuildFax, noted that “an increase in construction hiring suggests slowdowns in housing activity may be short-lived.” Also on Tuesday, the National Association of Home Builders (NAHB) report highlighted a surge in its builder confidence index for June.
From NAHB Chairman Dean Mon:
Inventory is tight, mortgage applications are increasing, interest rates are low and confidence is rising. And buyer traffic more than doubled in one month even as builders report growing online and phone inquiries stemming from the outbreak.
So, what’s behind this housing surge?
The following explanation from the Mortgage Bankers Association sums it up cleanly:
The housing market continues to experience the release of unrealized pent-up demand from earlier this spring.
***The housing boom that wasn’t
As 2019 turned into 2020, the housing market was preparing for a banner year.
U.S. existing home sales were up … average interest rates on a 30-year fixed mortgage was relatively low … there was a shortage of new homes on the market … and expectations were that the Fed would keep rates low for all of 2020.
Put it all together, and you had a U.S. housing market looking ready to boom.
Of course, we all know what happened next — the coronavirus hobbled the housing market along with the rest of the U.S. economy.
But while the fear was that the coronavirus would destroy the personal balance sheets of American homebuyers, it’s beginning to appear that the pandemic mostly just bottled up demand … that’s now beginning to hit the housing market.
***We’re seeing tailwinds behind home builders, home renovation companies, and mortgage lenders
Beginning with homebuilding stocks, let’s look at ITB. It’s the iShares U.S. Home Construction ETF, holding construction heavyweights including D.R. Horton, Lennar, and Pulte.
Though it fell harder than the S&P from February-highs to March-lows, it’s also rallied harder.
From the low in late March through today, you can see ITB surging 91% compared to the S&P’s 40%.
And just yesterday, we received news supporting more gains going forward. Construction of new houses rose 4.3% in May. This is the first increase since January.
Another sign of a faster housing recovery is seen in U.S. building permits, which jumped 14.4% in May.
From homebuilder Lennar’s executive chairman, Stuart Miller, on Tuesday:
While many parts of the economy are still waiting to open and rebound, the housing market has proven to be resilient in the current environment.
We expect this trend to continue and for housing to be a significant driver of employment and rebound for the broader economy.
***Turning toward home renovation companies, let’s look at Home Depot
While big-tech returns have nabbed the headlines recently, it might surprise you that Home Depot is up 17% in 2020.
This puts it as the third best-performing stock in the Dow, trailing only — you guessed it — big tech (Microsoft and Apple).
Fellow home renovation company, Lowe’s, is also outperforming, up 15%.
Here’s Mortgage Professional America explaining what’s behind this:
As a result of the coronavirus shutdown that has forced people to stay put in their homes, Americans have become motivated to tackle home renovation projects this year.
Around 73% of homeowners want to make home improvements in 2020 and intend to spend an average of $11,851, according to a LightStream survey.
***Finally, let’s look at mortgage lenders by highlighting the stock “perfectly positioned to take advantage of one of the biggest trends in the U.S. economy: housing“
That quote comes from Louis Navellier. He was describing private mortgage lender, PennyMac Financial, which was his pick for InvestorPlace’s Best Stocks for 2020 contest.
Here’s Louis from his update on Tuesday:
Even in Monday’s volatility, some of the best growth themes remained unstoppable.
That certainly includes the mortgage refinance boom, in which PennyMac Financial Services (PFSI) — my pick for the InvestorPlace Best Stocks for 2020 Contest — just hit a new 52-week high.
This week alone, it’s gained another 11%.
Below, you can see PFSI up 25% here in 2020, while the S&P still trades down nearly 4%.
Fueling these gains has been a surge in refinancing.
From CNBC:
Lower rates also fueled refinance demand. Those applications rose 10% for the week and were 106% higher than a year ago …
The refinance share of mortgage activity increased to 63.2% of total applications from 61.3% the previous week.
In our April 30th Digest, we suggested PennyMac as an attractive trade for investors more comfortable with risk. Digest-readers who placed the trade are up 35% compared to a 6% gain for the S&P over the same period.
***We expect more gains for PFSI, in large part, because one of the biggest dangers to the company has been subsiding — specifically, mortgage bailouts for forbearances
Earlier this week, we learned that the number of private-sector forbearances are down by 77,000 from last week and by 112,000 since the peak week of May 22.
But even if forbearances climb again, or remain stubbornly high, PFSI is amongst the best private lenders to handle it.
From our May 20th Digest:
Earlier this month, PFSI beat earnings estimates. And in the ensuring earnings call between the executive team and analysts, we learned why the company is likely to continue to perform well, even in this challenging environment.
From CEO, David Spector:
“PFSI’s strong balance sheet, low leverage and disciplined approach to liquidity management have been critically important in this market environment.
And our strong risk management discipline has resulted in an increase in our total liquidity since February …”
While lower-quality lenders have been anxious about a cash-crunch, PFSI has actually increased its liquidity despite record number of Americans in forbearance.
Wrapping up, if the surge in housing hasn’t been on your radar, take note. It’s looking like 2020 may end up being a banner year after all.
Have a good evening,
Jeff Remsburg
