There’s not enough housing inventory to meet demand … three ways to play it … a good defense against the threat of inflation
Yesterday, we learned that existing home sales crashed 6.6% between January and February.
For context, the decrease had been expected to come in at less than half of that — just 2.8%.
So, what was behind the surprise? And is it an early red flag pointing toward a troubled economy?
We have so many would-be homebuyers relative to homes available, that fewer transactions have been happening.
Last month, the number of homes on the market fell to a record low of just 1.03 million units. That was down 29.5% compared to a year ago. It’s also the largest annual decline on record.
From Lawrence Yun, chief economist of the National Association of Realtors (NAR):
Despite the drop in home sales for February — which I would attribute to historically-low inventory — the market is still outperforming pre-pandemic levels.
Even with the drop, NAR reports that sales were up 9.1% compared to February 2020.
***This imbalance between supply and demand is resulting in soaring home prices
Yahoo! Finance reports that the median existing-home price in February came in at $313,000. That’s up 15.8% from February last year.
Back to Yun:
It’s quite a dramatic drop that’s the reason why price is rising, demand is very strong and is reflected in days on the market.
We need more supply to tame the price growth.
It’s not just existing-home sales that are seeing upward pricing pressure. New home price-tags are rising too.
… as more buyers have closed on homes across the United States, supply has grown short, pushing prices up and sending developers scrambling.
New homes have also seen brisk sales, pushing prices up from an average of $384,000 in January 2020 to $408,800 in January of this year, a gain of 6.5 percent, according to the Commerce Department.
Rubeela Farooqi of High Frequency Economics predicted “record-low inventories are likely to support building activity, especially in the single-family sector.”
***So, how might you play this housing demand?
First, to target new-home construction, there’s ITB, which is the iShares U.S. Home Construction ETF.
It holds homebuilders and home improvement companies, including D.R. Horton, Lennar, Home Depot, Lowe’s, and Sherwin-Williams.
We first put ITB on your radar in our January 23, 2020 Digest. Since then, it has doubled the return of the S&P, as you can see below.
Given that ITB is an ETF, its returns are diluted by some of its weaker holdings. So, if you’re looking for potentially-larger gains, you can look at specific homebuilding stocks.
For example, over the last 12 months, Toll Brothers (a holding in ITB) has climbed 305% compared to ITB’s 172%, as you can see below.
***You could also play the boom through high-quality mortgage lenders
This was Louis Navellier’s approach last year, when he picked PennyMac Financial (PFSI) for his choice in InvestorPlace’s Best Stocks for 2020 contest.
Here’s what Louis wrote about it at the time:
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 …
As you can see below, beginning in 2020, PFSI has outgunned the S&P by nearly 3-to-1.
The thing to be mindful of with a lender is interest rates. Rates that rise too far, too fast, can put a curb on new loan originations and refinancing activity.
We’re in a rising rate environment today. Ending last week, mortgage rates posted a 5th consecutive week of gains. That said, they’re still quite low when viewed historically. Even compared to last year, they’re down. For example, on a year-over-year basis, the 30-year fixed rate mortgage is down by 56 basis points.
Plus, rising rates aren’t always bad news for top-tier lenders. On that note, here’s Andy Chang, PennyMac’s COO, discussing this tradeoff in PennyMac’s February earnings call:
Our large, organically built servicing portfolio provides a counter-balance to our production activity.
Declining interest rates generally produce strong earnings in our production segment, while rising rates will generally produce strong earnings in our servicing segment as prepayments decline and the value of the MSR increases.
This balanced business helps generate strong results across a variety of market and rate environments …
Economic forecasts are calling for the mortgage origination market to remain strong in 2021, and while these forecasts vary, they currently average $3.3 trillion. While such a market would be smaller than 2020, it would represent a large origination market by historical standards.
Chang goes on to note that purchase originations in 2021 are forecasted to increase 10% year-over-year while refinance originations are expected to decrease but remain elevated relative to historical norms.
***As another option, look to various direct rental real estate ownership opportunities
Traditionally, investing in rental real estate was limited to high-net-worth individuals who could afford expensive down-payments on properties.
Today, a handful of online platforms are changing this by offering fractional ownerships in residential and commercial real estate. This can be through investments in specific homes or commercial developments, or a fund with exposure to a broad portfolio of properties (similar to a private REIT).
These platforms offer investors a passive way to be a rental real estate owner without having to know all the details of a specific, localized market, and without the hassle of vetting tenants or, say, getting a call to replace a broken hot water heater at 2PM on a Saturday when you’re on the golf course.
Four of the most popular platforms are CrowdStreet, RoofStock, RealtyMogul, and FundRise. They vary by required investment size, fees, type of investment property available to investors, and whether they require accreditation, among other differences.
If you’ve had a good (or bad) experience with any of these companies (or a similar service), email us at Digest@InvestorPlace.com to let us know your thoughts. If one of them appears to receive a string of high praise from our readers, we’ll report back here in the Digest.
***One final reason why real estate is worth your consideration today
Last week, Federal Reserve Chairman Jerome Powell said he expects we’ll see an uptick in inflation … which he plans to ignore.
From The Wall Street Journal:
Inflation is poised to leap higher in the next few months due to a sharp dip in prices a year ago, as Mr. Powell himself pointed out (last) Wednesday. He said the Fed would ignore what he expected to be merely a blip.
But can we be sure it will be just a blip?
We’ve never seen so much money created by a central bank, then flooded into the economy. The scale is simply enormous, even compared to the Global Financial Crisis.
It’s for this reason that everyday investors are growing increasingly concerned about a sustained rise in inflation.
From Yahoo! Finance:
Judging by new Google search data compiled by Deutsche Bank strategist Jim Reid, the average Joe or Jane may be getting worried about inflation, possibly crimping purchasing power and longer run investment returns.
Reid found Google searches for inflation are now at their highest levels since late 2010 (chart below).
Historically, hard assets like real estate are a powerful way to protect the purchasing power of your wealth.
But even if inflation remains tame, the current lack of housing supply in the market is going to keep returns strong for investors this year.
Wrapping up, the housing boom continues and more gains are coming. Check out ITB, top-tier lenders, and direct-ownership real estate platforms as ways to play it.
And one more reminder to email us at Digest@InvestorPlace.com to report which online real estate investment platforms have treated your money the best.
Have a good evening,