As economists everywhere are searching tirelessly for the ever-elusive “V-shaped” economic recovery amidst the COVID-19 crisis, many seem to have passed on US homebuilders, as the industry continues be a major bright spot within the US economy.
US homebuilders continue to “build their homes on solid ground”, as the industry continues to be supported by strong cyclical and structural trends, despite the ongoing health crisis. Increased consumer preference for new, high-tech homes with amenities for both school and work, a sharp contraction in the supply of existing homes available for sale, and a growing desire to flock to the suburbs amongst city dwellers, led to a surge in housing demand in June. It is also the highest pace of sales growth for the industry, since the height of the unprecedented housing boom back in 2005.
According to the National Association of Home Builders (“NAHB”)/Wells Fargo Housing Market Index (“HMI”), industry sentiment surged 14 points to 72 in July, exactly where the index was back in March, right before COVID-19 hit the US economy. This is in stark contrast to the 30 level the index reported back in April. On a regional basis, homebuilder sentiment in the Northeast jumped 22 points to 70, and increased 18 points to 68 in the Midwest. Further, in the South, sentiment rose 10 points to 73, while in the West, it increased 14 points to 80. A level above 50 indicates positive sentiment, where as a level below 50 indicates negative sentiment.
Despite the ongoing COVID-19 pandemic, US homebuilders are seeing strong demand and lots of interest for new construction homes, as existing-home inventory continues to remain steady. On a regional basis, homebuilders in the West, Northeast, and Midwest are benefiting from renewed demand that was kept back due to the lockdowns in the early spring. Furthermore, record-low interest rates have also been fueling industry demand, as the Federal Reserve (“Fed”) cut rates to near zero, in an effort to contain the economic damage from the COVID-19 pandemic.
As a result of this easy monetary policy, US Mortgage rates have hit record lows in recent weeks, hitting 2.98% in July, well below the 3.65% rate set in March, and given the Fed’s mandate to keep rates close to zero until at least 2022, mortgages rates will continue to remain low for the time being. This has given prospective home buyers additional buying power, especially for newly-built homes, which come at a price premium over existing-homes. Mortgage applications to buy new homes surged over 50% in June year-over-year.
The surge in buyer demand has prompted homebuilders to raise their prices, as approximately 57% of builders surveyed said they had increased their prices for new homes. Nationally, home prices for new constructions in June rose 4.5% year-over-year. Builders have been raising prices, as new buyers are more serious and more impatient than they have ever been before. Record buyer traffic is converting into sales at a record rate, especially amongst newly-built homes, which is why the inventory of unsold, newly-built homes decreased 20% year-over-year in June, to just a 1.5-month supply.
US homebuilders are euphoric that housing demand has come roaring back, however this demand has taken the industry by surprise, leaving many builders unprepared. Since the onset of the COVID-19 pandemic, the US homebuilding industry severely curtailed their operations earlier in the year, and are now scrambling to quickly get back up to speed to meet this new demand.
The main issue for homebuilders is to focus on how they will ramp up production quickly, at a time when a recovery of this magnitude was largely unexpected. In March, many homebuilders stopped purchasing land and laid off many of their workers. Now, as industry demand has returned, builders are facing various challenges on the supply side, including higher prices for finished lots, more expensive labor and raw materials, and a slow local permit process from local cities, many of which are not yet open or fully operational.
Furthermore, there is still of course, the the dark clouds of the ongoing COVID-19 crisis. The risk we see here, is that if the US economy rolls back their re-opening initiatives, and re-imposes government-mandated shutdown measures yet again, unemployment could rise even further, putting the prospects for both housing strength and the industry in jeopardy, for remainder of the year. Though record-low mortgage rates are helping the industry, coupled with cash-rich buyers sitting on the sidelines waiting to jump into the market, at some point, home buyers will eventually hit their limit in terms of the price they are willing to pay for a new home. In fact, in the high-priced luxury existing home market, there are already signs that demand is starting to stall.
Nonetheless, the changing geography and demographics of housing demand is benefiting new builds. Demand for new homes is steadily increasing in low-density markets, including rural markets, small metro locations, and large metro areas, as people look for larger homes in anticipation of greater flexibility for remote working and schooling in the coming years ahead.
Given this backdrop, we are currently bullish on US homebuilders, as the industry has shown its resilience in the face of the COVID-19 pandemic. In the interim, the industry is supported by strong cyclical factors, specifically record-low interest rates and a surge in mortgage applications. In the long run, we do see the industry continuing to be supported by structural factors, specifically buyer demand in choosing the suburbs over city living.
Overall, so long as the current environment persists, we believe US homebuilders are on solid ground.
**For those interested in looking to invest and/or trade this macro theme, check out our article “A Strong Foundation Makes a Steady Home – US Homebuilders Continue to Shine – Trade Ideas” for our trade ideas.
A Strong Foundation Makes a Steady Home – US Homebuilders Continue to Shine
US Homebuilders continue to find themselves on solid ground, as the industry continues to thrive amidst the COVID-19 crisis.
Back from the Abyss: Green Shoots Sprouting Throughout the US Economy
As economists everywhere are searching tirelessly for the ever-elusive “V-shaped” economic recovery amidst the COVID-19 crisis, many seem to have passed on US homebuilders, as the industry continues be a major bright spot within the US economy.
US homebuilders continue to “build their homes on solid ground”, as the industry continues to be supported by strong cyclical and structural trends, despite the ongoing health crisis. Increased consumer preference for new, high-tech homes with amenities for both school and work, a sharp contraction in the supply of existing homes available for sale, and a growing desire to flock to the suburbs amongst city dwellers, led to a surge in housing demand in June. It is also the highest pace of sales growth for the industry, since the height of the unprecedented housing boom back in 2005.
According to the National Association of Home Builders (“NAHB”)/Wells Fargo Housing Market Index (“HMI”), industry sentiment surged 14 points to 72 in July, exactly where the index was back in March, right before COVID-19 hit the US economy. This is in stark contrast to the 30 level the index reported back in April. On a regional basis, homebuilder sentiment in the Northeast jumped 22 points to 70, and increased 18 points to 68 in the Midwest. Further, in the South, sentiment rose 10 points to 73, while in the West, it increased 14 points to 80. A level above 50 indicates positive sentiment, where as a level below 50 indicates negative sentiment.
Despite the ongoing COVID-19 pandemic, US homebuilders are seeing strong demand and lots of interest for new construction homes, as existing-home inventory continues to remain steady. On a regional basis, homebuilders in the West, Northeast, and Midwest are benefiting from renewed demand that was kept back due to the lockdowns in the early spring. Furthermore, record-low interest rates have also been fueling industry demand, as the Federal Reserve (“Fed”) cut rates to near zero, in an effort to contain the economic damage from the COVID-19 pandemic.
As a result of this easy monetary policy, US Mortgage rates have hit record lows in recent weeks, hitting 2.98% in July, well below the 3.65% rate set in March, and given the Fed’s mandate to keep rates close to zero until at least 2022, mortgages rates will continue to remain low for the time being. This has given prospective home buyers additional buying power, especially for newly-built homes, which come at a price premium over existing-homes. Mortgage applications to buy new homes surged over 50% in June year-over-year.
The surge in buyer demand has prompted homebuilders to raise their prices, as approximately 57% of builders surveyed said they had increased their prices for new homes. Nationally, home prices for new constructions in June rose 4.5% year-over-year. Builders have been raising prices, as new buyers are more serious and more impatient than they have ever been before. Record buyer traffic is converting into sales at a record rate, especially amongst newly-built homes, which is why the inventory of unsold, newly-built homes decreased 20% year-over-year in June, to just a 1.5-month supply.
US homebuilders are euphoric that housing demand has come roaring back, however this demand has taken the industry by surprise, leaving many builders unprepared. Since the onset of the COVID-19 pandemic, the US homebuilding industry severely curtailed their operations earlier in the year, and are now scrambling to quickly get back up to speed to meet this new demand.
The main issue for homebuilders is to focus on how they will ramp up production quickly, at a time when a recovery of this magnitude was largely unexpected. In March, many homebuilders stopped purchasing land and laid off many of their workers. Now, as industry demand has returned, builders are facing various challenges on the supply side, including higher prices for finished lots, more expensive labor and raw materials, and a slow local permit process from local cities, many of which are not yet open or fully operational.
Furthermore, there is still of course, the the dark clouds of the ongoing COVID-19 crisis. The risk we see here, is that if the US economy rolls back their re-opening initiatives, and re-imposes government-mandated shutdown measures yet again, unemployment could rise even further, putting the prospects for both housing strength and the industry in jeopardy, for remainder of the year. Though record-low mortgage rates are helping the industry, coupled with cash-rich buyers sitting on the sidelines waiting to jump into the market, at some point, home buyers will eventually hit their limit in terms of the price they are willing to pay for a new home. In fact, in the high-priced luxury existing home market, there are already signs that demand is starting to stall.
Nonetheless, the changing geography and demographics of housing demand is benefiting new builds. Demand for new homes is steadily increasing in low-density markets, including rural markets, small metro locations, and large metro areas, as people look for larger homes in anticipation of greater flexibility for remote working and schooling in the coming years ahead.
Given this backdrop, we are currently bullish on US homebuilders, as the industry has shown its resilience in the face of the COVID-19 pandemic. In the interim, the industry is supported by strong cyclical factors, specifically record-low interest rates and a surge in mortgage applications. In the long run, we do see the industry continuing to be supported by structural factors, specifically buyer demand in choosing the suburbs over city living.
Overall, so long as the current environment persists, we believe US homebuilders are on solid ground.
**For those interested in looking to invest and/or trade this macro theme, check out our article “A Strong Foundation Makes a Steady Home – US Homebuilders Continue to Shine – Trade Ideas” for our trade ideas.
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