The housing industry comprises of a wide assortment of businesses, from small local contractors to multi-national suppliers. In addition, are a variety of real estate properties, from single-family houses to downtown skyscraping office towers. All is well for small and large companies and properties when markets are rolling along consistently without any major disruption. However, throw in a world pandemic, society-changing working standards, and dramatic changes in the cost of funds and interest rates, and everyone in this industry is impacted one way or another.
The pandemic and subsequent government restricting regulations on society and businesses in 2020 was the beginning of major disturbances in the residential market. As businesses adopted quickly with remote work arrangements for their employees, people realized they could move out of their high-priced small metropolitan residences to larger houses in more affordable suburbs that substantially increased housing demand in these areas. The fastest-growing suburbs in size and price increases were lower-cost areas or states as millions of people freed from their offices were now able to work remotely anywhere with the internet.
Many had favorable arbitrage of equity moving from higher housing cost areas to lower-cost areas, and with sub 3% mortgage rates, had significant buying power. Builders could not keep up with this new demand, and the lack of supply resulted the same explosive housing appreciation of the early 2000s, with some areas increasing in price by 20% to 50% in just two years. Illustrated below is the significant recent rise in housing prices indicated in the Case-Shiller Home Price Index in the US.
What Does This Mean to Me?
Circling back to stocks of home builders and suppliers, we view the recent decline in stock prices as a buying opportunity. The housing supply and demand imbalance will be resolved over the next several quarters. The rise in mortgage rates only returned to the average rate through the entire housing boom in the early 2000s. Stocks prices for Home Depot and Lowes will also in our opinion recover as their sales are still strong (have you been to Home Depot lately, people everywhere) and we believe the selloff of these stocks was an overreaction to the fear people would suddenly stop remodeling or fixing up their houses whether to prepare to sell or because they just bought a new house.
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