July 8, 2021
My friend just sold her home… in 10 days. She got a full-price, all-cash, no-contingency offer that will close in in 30 days. Pretty sweet.
She has been wanting to sell for a few years now so she could upgrade to something larger for her growing family. She even tried – unsuccessfully – to sell her house shortly before COVID hit…
What a difference 17 months – and a global pandemic – makes.
As a result of COVID and its ensuing lockdowns, people grew to appreciate their homes more. Spending so much time at home seemed to have everyone wanting more home… and suddenly houses – like my friend’s – were selling like hotcakes.
Of course, now she has to find a new home… And I don’t envy her that. Finding a new house within your budget is easier said than done in this red-hot housing market.
Home prices are skyrocketing. So much so that the former Treasury secretary under Bill Clinton, Larry Summers, called the price tags “scary” in an interview last week.
Let’s be clear… The low interest rates and the buying-up of mortgage-backed securities by the Fed certainly will contribute to inflationary pressures on housing – just as those low interest rates and bond-buying programs have helped contribute to inflation just about everywhere else.
According to the National Association of Realtors (“NAR”), the median existing-home sales price in May topped $350,000 for the first time. That’s nearly 24% more than it was a year ago and the biggest year-over-year price increase NAR has recorded in data going back to 1999!
The questions for investors now include… how long can this continue? And if you haven’t already bought into homebuilders, is it too late to do so? Meanwhile, if you already own these names, is it time to unwind your positions?
Some market watchers have suggested that we are at risk of a 2008-style debt crisis triggered by the housing market all over again…
Sooner than most people think, millions of Americans will find themselves abandoned: pushed out of the dwindling middle class, out of private retirement and health care, and out of a decent life of liberty. To most folks, how and why this will happen is unknown. That’s why Dr. Eifrig has gone public with the most vital and comprehensive analysis of this fiscal emergency. Get the details here.
Will History Repeat Itself?
Now, we should always be on the lookout for market bubbles… And I’m fairly convinced we’re in one right now that will at some point in the coming three years risk getting popped.
The Fed is walking a tightrope, as I’ve explained before, and we all need to hope it gets this right… Although, historically speaking, it rarely does, and the market bubbles that I’ve covered in 2000 and 2008 (the latter of which was an even worse crisis thanks to its systemic and global nature) were both attributable in many ways to overdone monetary policy.
It’s important to keep that sensibility and skepticism in mind because a pullback in bond buying or a rapid hike in interest rates could unleash a chain reaction in markets that might become quite challenging to overcome.
Moreover, if the Fed does nothing and we see runaway inflation (which is also quite possible), we risk a series of other problems that Paul Volcker (the former head of the Federal Reserve in the inflationary late 1970s) can confirm… inflation is very hard to fight.
But all this aside, in the near term, there may still be an opportunity that is worth capturing. Zillow is forecasting 6.4 million home sales in 2021, up 13.5% from an already robust 2020 and the highest level recorded since 2006.
Plus, keep in mind, the housing market today is not like the housing market in 2006. In the years preceding the 2008 crash, there was a tremendous amount of inventory on the market – much unlike the tight inventories we see today. In addition, lending standards are far stricter now than in the years leading up to the financial crisis.
I lived in San Francisco for five years beginning in 2000. I often thought of buying a home but ultimately resisted because, as an East Coaster, I didn’t want to be stuck with an asset that was so far away. And whenever I was touring homes and condos, one thing always jumped out at me… The realtors would have flyers on the kitchen counter, advertising low teaser rates with aggressive 3/1 or 5/1 adjustable-rate mortgages.
Now, in my mind, I thought… but rates will have to go up.
The problem is (as we now know) too many homebuyers didn’t understand that… Sure, it can be hard to believe that people didn’t understand that their mortgages would reset. But those who found themselves in aggressive “no income, no asset” loan products were often handed mortgages that they, in many cases, had no way to actually pay – and certainly not when mortgage rates went up.
Disaster ensued… You know how it all went down…
The banks folded those mortgages into healthier mortgage-backed securities portfolios, thereby creating a kind of mortgage “omelet” that looked great on the outside, but inside was filled with overly ripe, poisonous veggies.
Banks tried to rid themselves of these mortgage portfolios as fast as they could… Instead, as the housing market cratered, no one wanted to own these assets. In fact, many of them had clauses allowing the institutional owners to flip them back on the banks, compounding the problem.
Suddenly, the problem grew much worse. Lenders stuck warehousing these loans were forced to value those mortgage portfolios in real time, and the losses piled up. And the rest – complete with the bankruptcy of Lehman Brothers, one of the oldest, most storied banks in the nation – is history.
There’s plenty of blame that could go around… from the banks to the homeowners to the politicians to Alan Greenspan… But the bottom line is, if you were an investor in homebuilders back then, you paid the price. And you certainly don’t want a repeat of that movie again.
This is why it’s crucial the banks be stricter in their lending strategies.
At present, the majority of home loans being offered are what you would call “conforming” loans, meaning they’re the traditional 30-year fixed-rate mortgages with 20% down. In fact, during the month of April, the NAR said 50% of all loans involved a down payment of at least 20%. That’s only the third time this has happened since it began keeping records, and all three instances have been since last fall.
The down payment is important because it reduces the incentive for people to simply “walk away” from their investment, as we saw happen during the financial crisis… Buyers who had put down 5% up front to buy a home had less incentive to ride it out.
So with inventories low and banking regulations far more strict, there’s an underlying health to the sector that gives it more support as we see an increase in demand.
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How to Play It
This is why I’m still confident in homebuilding stocks. I know, I know… you look at the SPDR S&P Homebuilders Fund (XHB) – which includes not just homebuilders but some of the companies in the space like Williams-Sonoma (WSM) – and you think woah, it’s up nearly 30% this year alone.
But if the trend toward homeownership is still valued (as I believe it is), this sector can capture additional upside… Owning a home is intrinsic to the American Dream and an important part of our culture.
One way to capitalize on the increase in entry-level home buyers is through American real estate development company Meritage Homes (MTH), which is primarily focused on the fast-growing Sun Belt region and dedicated to first-time home buyers. Known as the “Sun Belt Surge,” folks are moving to cheaper, sunnier areas with affordable properties.
Meritage’s top-line revenues grew at a stellar 23% last year in the middle of one of the craziest economies we’ve ever since. What’s more, the company has posted two earnings surprises of 18.2% and 39.8% in recent quarters growing 88% year-over-year. With surging housing prices, the company is targeting upwards of $4.8 billion in home sales for 2021. (That’s a lot of home value!)
Meanwhile, it’s worth considering the ancillary businesses around the homebuilding sector, too. One of my perennial favorites in this space is the do-it-yourself giant Home Depot (HD). The company has been generous to shareholders with dividends and buybacks over the last five years, returning more than $7 billion to shareholders last year alone.
For those who really want to tiptoe into the sector with diversification in a company engaged in asset management, the world’s largest asset manager BlackRock (BLK) could be an option. BlackRock has nearly $9 trillion-plus under management. To put that in perspective, that means BlackRock has roughly one-half the size of the U.S. economy (with a GDP of $20 trillion) under management. BlackRock is long green energy, which, whether you agree with it or not, is the agenda of this administration, and BlackRock recently ventured big time into residential real estate. The company owns around $60 billion in real estate assets.
Bottom line… This is a sector to watch and a sector that, despite its recent strength, still has more room on the runway for growth in the coming months. With inventories so low, mortgage rates (still!) low, and demand quite high, the move into a single-family dwelling is still a priority for most Americans.
Let’s hope it stays that way… Homeownership plays an important role in people setting down roots and taking pride in their community. It’s part of the American value set and should be for years to come.
As for my friend… she is on the hunt for a good piece of land and has already begun the process of designing her new home. It’s challenging given the recent increase in value in our small New England town… And though she has got an “in” – her husband is a contractor – the question now is: Will she be able to pull him away from his recent surge in business to work on their family home? We’ll see. But as I remind her, that’s a good problem to have.
America. Is. Back.
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Publisher, American Consequences
With Editorial Staff
July 8, 2021