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Wed, September 30 at 4:00PM ET
 
 
 
 

Pent-up Demand Fuels This Sector

Mortgages rates hit record lows … homebuilders rack up gains … mortgage services are benefiting too

 

Yesterday, the S&P 500’s home-building subindustry index closed at a new record high for the first time in 15 years.

The index, including homebuilders, Lennar Corp., D.R. Horton Inc., PulteGroup, and NVR, is up 23% on the year, compared to the S&P, up a shade under 5%.

 


***It was two weeks ago that Matt McCall, editor of Investment Opportunities, wrote to his subscribers that “the housing breakout is only getting started”

 

He pointed toward two reasons …

From Matt:

The first is simply the incredible fact that people have been able to get a 30-year fixed mortgage for less than 3%.

Back in the early 1980s, folks were paying 14% … 15% … even 18%. This time last year, that rate was 3.81%. That’s cheap, but it’s gotten so much cheaper.

To Matt’s point, a few days ago, the 30-year fixed mortgage rate sank to its lowest level on record — 2.88%, according to data released Thursday by Freddie Mac. This is the lowest level since Freddie Mac began tracking mortgage rates in 1971.

Of course, if the trend continues, it could sink even lower. That’s because the 2.88%-mark was the eighth time that the 30-year fixed rate has fallen to a new low since March.

These basement-level rates have been a huge lure for prospective homebuyers as they’ve had a substantial impact on home affordability.

Back to Matt:

… the housing boom makes a lot of sense — simply because low interest rates make homes affordable to someone who was previously not able to make the monthly payment. And this trickles down even more …

People can step up into bigger homes. They can also get into the same home they would have bought last year … paying less, saving more, and having more disposable income.

Meanwhile, millennials have been waiting to start families. And now they can.

Mortgage News Daily (MND) recently put numbers on this:

Those shopping for a home can afford 10 percent more home than they could have one year ago while keeping their monthly payment unchanged. This translates into nearly $32,000 more buying power.


***Matt noted that demand has been so strong that supply hasn’t been able to keep up

 

In his update, he highlighted the 10-year chart of U.S. existing home inventory, highlighting how it’s been cut in half since 2010.

 

 

Here’s more on this shortage from Forbes:

Scarred by the housing bust, homebuilders have been sitting on their hands for the past decade.

Census Bureau data shows an average of 1.5 million homes were built each year since 1959. Yet over the past decade, just 900,000 homes have been built per year.

We have a serious housing shortage in America today. Millions of homeowners chose not to list their homes during the peak of the coronavirus … which has only “shrunk” supply further.

As homebuilders try to catch up to demand today, it’s benefiting homebuilding stocks.

We can see this by looking at ITB. It’s the iShares Home Construction ETF.

It contains many of the major homebuilders, like D.R. Horton, Lennar, and Pulte. But it also contains home supply and home improvement companies, like Home Depot and Sherwin-Williams.

As you can see below, ITB has soared 25% since early July, as the effects of homebuyers re-entering the market began to be felt (the S&P has climbed 8% over the same period).

 

 

Yet, according to Matt, there’s more juice in many of these homebuilding stocks due to their reasonable valuations.

Back to his update:

And here’s the second reason this is all going to continue … the homebuilders stocks are still cheap …

Keep in mind that homebuilders typically do trade below the market average. Earnings will also see a dip this year due to the pandemic, but revenues are still expected to increase.

And no matter what, these kinds of valuations are flat-out cheap!

Matt recommends a specific homebuilder in his Investment Opportunities portfolio. He tells us its price-to-earnings (P/E) ratio is around 15, versus 22 for the S&P 500. That makes it about a third cheaper than the market. You can learn more as a subscriber by clicking here.


***But homebuilders aren’t the only ones benefiting from record-low mortgages

 

Louis Navellier’s pick for InvestorPlace’s Best Stocks for 2020 contest was mortgage services company, PennyMac Financial (PFSI).

Here’s Louis describing it from back in December:

PennyMac Financial Services (NYSE:PFSI) is certainly one of my favorite picks for the coming year.

Why? Because it is perfectly positioned to take advantage of one of the biggest trends in the U.S. economy: housing …

… the Federal Reserve has spent the whole year reverting to a very accommodative monetary policy. Low interest rates are here to stay and banks are lending.

This all bodes well for both the housing industry and home buyers. Even renters that are looking to upgrade will benefit from lower construction costs, since more availability means more price competition …

PFSI’s stock price was hurt along with the rest of the market back in the March volatility. But since then, it’s been soaring.

While the mortgage company is benefiting from the surge in home sales like ITB, PFSI has a secondary revenue tailwind behind it — refinancing.

From Forbes:

The residential housing market is worth $35 trillion. And it’s absolutely BOOMING.

This past month, new home sales surged 55% — their biggest gain since 2005. The number of Americans looking to refinance their mortgages jumped 111%.

Between new mortgage originations and refinancings, PFSI crushed earnings last week.

Here’s Louis with more details:

PFSI crushed analysts’ earnings and revenue forecasts for the second quarter.

The company achieved earnings of $352.7 million, or $4.39 per share, on $821.6 million in revenue. The consensus estimate called for earnings of $2.89 per share on $661.29 million in revenue, so PFSI beat earnings estimates by a whopping 51.9% and revenue forecasts by 24.2%

PFSI also announced that it will pay a quarterly dividend of $0.15 per share on August 28. The dividend represents a 25% increase over the previous quarter’s dividend.

This good news led to another surge for the stock that’s now up 56% here in 2020.

 

We put a PennyMac trade on your radar in your April 30th Digest. Readers who acted on it are up 68%, with more gains appearing likely.

As we wrap up, the housing market keeps getting hotter, and homebuilders and PennyMac are benefitting.

As the economy continues re-opening and pent-up homebuying demand keeps hitting the market, we should expect this trend to continue.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/pent-up-demand-fuels-this-sector/.

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