Moving on up!
From the Macro’s
US Housing data for January came out the other week and painted an interesting picture for investors. Housing starts were well below expectations building permits lower too. Existing home sales exceeded estimates and have seen a huge turnaround since March 2020. Average house prices at that time stood at $322k vs $346k for Q4 2020, an uplift of 7.5%.
Source: St. Louis Fed
The S&P Homebuilding index has also mirrored that performance as can be seen in the below chart:
Source: Bloomberg
Housing prices had already started rising before the pandemic. However, that event placed limits on homebuilders’ ability to build, and they have less land available to build on. Meanwhile, the stock (number of) homes for sale have plummeted and remain down around 30% of what it has been in recent years.
US interest rates now look to have changed direction and are now rising, many commentators warning of inflation. That may be the case in the future, but rates are still very low from a historical standpoint, that borrowers will be encouraged to takeout mortgages now rather than wait. Additionally, the US Government’s series of stimuli during the past year equates to almost 25% of GDP and asset prices appear to be in the early stages of a bull run.
According to https://www.mymove.com/moving/covid-19/coronavirus-moving-trends/, 16m people made ‘change of address’ requests to USPS between February and July 2020, almost 4% more than for the same period in 2019. In the same article they note that temporary changes of address were up 27% from last year. The same study indicates that people are moving out of urban areas heading to the sticks.
However, Zillow produced a report which suggested that all markets were seeing a good deal of activity.
The counter argument to the above comes from the increase in Forbearance and Deferrals which according to Experian https://www.experian.com/blogs/ask-experian/how-much-americans-owe-on-their-mortgages-in-every-state/ have risen by 67% ( to a total of $944bn) since the pandemic began, being around 9% of total outstanding US mortgage debt.
To the Micro’s
Pulte Homes, Lennar and DR Horton have all produced excellent results over the past few months. PHM indicating a 20% increase in deliveries over last year with demand seen as continuing going into this year. Goldman Sachs changed from ‘Sell’ to ‘Buy’ on KBH a week ago as selling season goes full throttle.
Source: Bloomberg
Generation X, Y and early “Z’s” account for roughly half the population, these people are now in peak earnings of their lives, with mortgage rates at record lows and having spent much of the past year in conditions where the ability to spend has been restricted, many of them are now able to find a home of their own.
If we then factor in other aspects of the pandemic, the work-from-home lifestyle that companies are embracing, the tax pressures that various states within the US are looking to charge on their citizens etc. And they are doing so in an environment where there is less housing stock available. Zillow Economic research estimates prices will increase by 13.5% by mid-2021 and for home values to be up 10.5% in 2021 against a 30-year average of 3.8%. increase.
Source: Bloomberg
The above table is an excerpt from our S&P500 screen with a focus on the Consumer Durables segment. Only one of the top 5 scorers is not a housebuilding company.
The interesting titbits
Every aspect of our lives is being affected by the Internet; Real Estate is moving on there too. There are a few companies that we do not screen that have differentiated business models that may be worth looking at.
· Opendoor Technologies (OPEN), originally a SPAC listing and listed for less than a year, enables people to buy and sell their homes through a mobile device, in a similar way to the “Webuyanycar.com” routine you might have seen on the TV. OPEN agrees a slightly discounted price with the vendor for speed of completion and sells the property on. OPEN could be viewed in the same way as Zoopla, Rightmove in the UK as geared plays to the UK property market.
· Rocket Companies (RKT) (see chart below) another company that might be worth considering? It is ‘king’ of the mortgage origination business. RKT was listed last June, with a strap line of “We enable homeownership and financial freedom”- very Gen, X, Y, Z’er! and has been around since 1985. A modern-day version of the UK Building Society of sorts. In their latest Q4 report issued last week, they announced a special 5% dividend together with 144% year on year increase in turnover for the fourth quarter and provided strong guidance for this year.
©Simon Abel
simonabel@gatecapitalgroup.com
The views expressed are those of the author alone.
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