Very recently, the Fed notified that the current coronavirus-related economic downturn is totally different from those that we faced before. Fed Chair Jerome Powell in a speech said, “earlier in the post-World War II period, recessions were sometimes linked to a cycle of high inflation followed by Fed tightening.”
But since the financial crisis in 2008, rates have remained only low. Years of low rates “have brought a series of long expansions, often accompanied by the buildup of imbalances over time — asset prices that reached unsupportable levels, for instance, or important sectors of the economy, such as housing, that boomed unsustainably.”
Yes, the housing boom has been one of the most notable ones in the recent decade. iShares U.S. Home Construction ETF (ITB - Free Report) , returned about 134% since the start of 2008. This was against the 154% gains noticed in SPDR S&P 500 ETF Trust (SPY - Free Report) .
Situation Amid Virus Outbreak
Homebuilders like D.R. Horton Inc. (DHI - Free Report) and Meritage Homes (MTH - Free Report) hinted at weakening sentiments among homebuyers in the peak of the coronavirus-led economic shutdown. Job loss, fear of uncertainty and dearth of cash led to rampant order cancellations. As a result, builders’ confidence got hurt too. Still, several homebuilders delivered mixed-to-upbeat Q1 earnings.
U.S. homebuilding declined to a five-year low in April. Housing starts nosedived 30.2% to a seasonally adjusted annual rate of 891,000 units last month. The decrease was more severe than the analysts’ expectation of a 26% decline.
Though many states considered homebuilding as essential amid coronavirus-led lockdowns, disruptions in supply chains of raw materials have probably weighed on activity. However, things look like a matter of the past now as confidence among U.S. single-family homebuilders, which accounts for the largest share of the housing market, rose in May.
What Will be the Pricing Trend Ahead?
Shortage of labor, land and inventory caused a spike in home prices in all these years. However, the coronavirus crisis is likely to cause the price to decline 2-3% a by the end of 2021, per Zillow Group, which estimated that U.S. GDP will decline 4.9% this year and increase 5.7% next year.
Still, Zillow Home Value Index for the United States has jumped to $245K for March 2021 from the low of $161K in November 2011, indicating about 52% jump in the index. In March 2020, the Value Index stood at $248K.
What About Future Sales Volume?
Per Zillow, the decline in economic growth will cause home sales to drop up to 60% when compared to pre-coronavirus levels. However, sales volume is expected to experience a slightly faster pickup than prices, showing signs of recovery by the end of June 2020, per Zillow. The research group also “expects much more short-term disruption than longer term."
On the other hand, another group Realtor.com expects home sales in the United States to rebound in late summer and early fall as fears of coronavirus begin to cool down, before experiencing a slump again later in the year. Real estate brokerage Redfin too appears optimistic. Home-buying demand has come back with force, now 5.5% higher than it was pre-pandemic, per Redfin. Inventory is down 24%.
Low Mortgage Rate: A Boon
That said, extremely low levels of mortgage rates should facilitate some affordability. Realtor.com predicts that mortgage rates will drop to new record lows — below 3% — by the end of 2020. The Fed’s record low rates and unlimited QE has caused such low mortgage rates.
Credit Conditions of Sector Players Look Decent
Investors should note that due to the Fed’s plan to buy corporate bond ETFs this year, there has been a surge in debt issuances among American companies of late. So, credit ratings of the housing company's proposed senior unsecured note offerings can act as guidance for the sector’s well-being.
Fitch Ratings recently affirmed a Stable outlook to NVR NVR and D.R. Horton’s (DHI - Free Report) proposed debt offering. Both have received BBB+ and BBB rating, respectively, indicating decent credit conditions.
Overall, debt-equity ratio of the sector stands at 0.50x versus for the S&P 500-based ETF SPY’s 0.76x. Current ratio of the industry stands at 4.44x versus 1.28x of IVV, meaning the sector is well positioned in meeting short-term liquidity need.
Stocks in Focus
Lennar Corporation (LEN - Free Report) , PulteGroup Inc. (PHM - Free Report) , NVR Inc., D.R. Horton, and KB Home (KBH - Free Report) are some of the stocks that investors should keep a tab on.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
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