The trade war has sparked tensions for many, particularly those with exposure to tech. But there are a few areas that may even be benefiting from the current nervousness in the stock market.
The housing market is one such area. Despite regional variation in prices, weather, demand, and so on, there are some really big drivers that apply to the industry overall.
For one, this market is actually seeing some supply shortage because of a reduction in the number of homes built over the last 10 years. This was partly because of economic pressures and partly because millennials have been steering clear off the market, preferring to rent or stay at their parents. The other major reason has been the inability to make a decent profit in the affordable housing area, which has pushed homebuilders toward the “luxury” market.
Since millennials (an 80 million+ market, according to the Census Bureau) are now showing some tendency to set up homes, demand is likely to pick up, which will lead to higher volumes that could allow profitability again at the low end.
In the meantime, the supply shortage has led to a huge increase in home prices that is not commensurate with the increase in wages. In fact, experts like Lending Tree Chief Economist Tendayi Kapfidze says that the lack of affordable housing has pushed up home prices to 3X the increase in wages.
As a result, despite the fact that home buyers are living in the same homes for longer than they ever have before (11 years), they aren’t showing any desire to move. Therefore, the existing home sales market, which comprises 90% of the housing market, is actually showing a slight decline in sales.
So how does this tie in with the trade war?
Tensions in the stock market are leading more investors to the bond market, which in turn is lowering bond yields. The yield on the 10-year determines mortgage rates, which explains why they are at their lowest level in almost a year. Lower mortgage rates obviously make housing more affordable, which could attract the buyers waiting on the sidelines.
So we’re seeing pent-up demand because of demographics and mortgage rate-related affordability. Significantly higher demand is likely to encourage building at the low end (where there is shortage), which in turn will lead to profitability at home builders.
Grab These Homebuilder Stocks Before It’s Too Late
The industry is in the top 21% (54 of more 250 Zacks classified industries). Since industries in the top 50% outperform the bottom 50% by a factor of more than 2 to 1 because of industry specific positives such as those discussed above, this is a factor investors should consider before pulling out their wallets.
NVR, Inc. (NVR - Free Report) offers homes under the Ryan Homes, NVHomes and Heartland Homes brands and mortgage banking services that help buyers buy the homes it builds.
Zacks Rank #1 (Strong Buy)You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
VGM Score A
Average EPS beat in the last 4 quarters is 17.6%, 41.8% positive surprise in the last quarter
June quarter EPS up 16.4% in the last 60 days, 2019 EPS up 12.2%.
PulteGroup, Inc. (PHM - Free Report) operates through Centex, Pulte Homes, Del Webb, DiVosta Homes, and John Wieland Homes and Neighborhoods brands, serving different segments of buyers. Its mortgage banking unit operates under the Pulte Mortgage LLC brand.
Zacks Rank #1
VGM Score A
Average EPS beat in the last 4 quarters is 13.5%, 25.5% positive surprise in the last quarter
June quarter EPS up 5.1% in the last 60 days, 2019 EPS up 6.6%.
Taylor Morrison Home Corp. (TMHC - Free Report) is a homebuilder and land developer engaged in building single-family detached and attached homes for first-time buyers, move-up families to luxury and active adult customers. Its brands are Taylor Morrison, Monarch and Darling Homes.
Zacks Rank #1
Value Score B
Average EPS beat in the last 4 quarters is 38.7%, 27.8% positive surprise in the last quarter
June quarter EPS up 13.5% in the last 60 days, 2019 EPS up 6.9%.
M/I Homes, Inc. (MHO - Free Report) is one of nation's leading builders of single family homes for first-time, move-up, luxury and empty nester buyers across six states.
Zacks Rank #2
Value Score B
Average EPS beat in the last 4 quarters is 8.4%, 4.9% positive surprise in the last quarter
June quarter EPS up a penny in the last 60 days, 2019 EPS up 2.1%.
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