Housing demand and tight supply suggest further upside ahead for this sector. That means housing market stocks will head higher too.
There was always a lingering fear after the Great Recession that the housing market would collapse the next time the economy took a downturn. Well, here we are. And housing has held up rather well despite the volatility in stocks.
While housing statistics have been off in the past few months, they look far better than the data covering other parts of the economy. Most real estate investors feel outright optimistic right now.
In fact, some analysts see this as a sign of strength. And they say many housing-related stocks will likely climb far higher from here as a result.
As Ivy Zelman, CEO of Zelman & Associates, told CNBC on Wednesday (video above):
We raised price targets on average about 25%. With today’s pullback we have stocks with 30-plus% upside to our price targets. We really see great, compelling value.
A number of factors have played into housing’s favor during this crisis. First, during the last recession, housing was seen as an epicenter.
Over the decade since, lenders have increased underwriting standards, requiring higher down payments and verified income. Homeowners have shunned leverage and large cash-out refinances as well.
That’s kept leverage in the space down and provided a cushion against today’s market uncertainty.
Those trends kept housing demand low for years. But that’s the real story today. Housing demand has gradually risen over the years. Now, demand is so strong that sales are up year-over-year after a brief dip during the worst of the economic lockdown.
As home prices continue to head higher, the supply of homes for sale under construction has dropped about 15% compared to a year ago. Building permits for future construction are down about 10%.
In short, the supply of new homes is likely to grow at a lower rate over the next few years. And that’s happening at a time when demand is robust. That’s a simple recipe for continued strength in the housing market.
In any market, there will be winners and losers. In the housing space, there are a number of stocks likely to benefit from the ongoing strength in the housing market.
1. Lennar (NYSE: LEN) has managed to improve its profit margins in the past year, even with the recent weakness in the housing space.
And its inventory has dropped as well, reflecting a potential shortage ahead. Although the company’s recent earnings and guidance were poor amidst uncertainty, that provides some relative value now.
2. Toll Brothers (NSYE: TOL) helped kick off the “housing market recovery” story when they released earnings last month, reporting a surprise beat. The company highlighted strong deposit payments and maintained its deposit-to-contract conversion ratio.
That’s a sign that high unemployment is largely a phenomenon for lower-paid workers, as Toll Brothers focuses on a luxury market.
3. Home Depot (NYSE: HD) is also an attractive play for investors seeking exposure to a resilient housing market. The home improvement retailer has fared well during the crisis, and as consumers look to continue with home nesting trends, they’ll want to address projects that they had been putting off before.
That kind of staying power is why the retailer looks like a better bet than some of the higher-end stay-at-home plays that have soared in recent weeks.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the stocks mentioned.
Last modified: September 23, 2020 2:01 PM