The U.S. housing market is cruising along nicely in October 2020. Despite lousy economic fundamentals, home prices across the U.S. are rising and inventories are falling as buyers compete against each other to take advantage of the low residential mortgage rates. More than 100 economists believe that home prices will grow by 3.7% in 2020. The same economists had estimated a 0.3% decline in a survey conducted 3 months earlier.
Though these economists are optimistic about the housing market in 2020 and 2021, around 45% of them expect home prices to soften in the long term because the elevated unemployment levels are not about to reverse in a hurry.
The spike in home prices started in April 2020. At that time The Lead-lag Report latched on to the trend and tweeted data that suggested investors were allocating capital to properties in high-earning suburban communities.

Here are the key statistics and projections for investors interested in tracking this market:

Existing Home Sales
A per the National Association of Realtors (NAR), existing home sales dipped in June 2020 but bounced back with a vengeance in August 2020.

The median selling price of existing homes also ticked up to about $300,000 in August 2020, up by about 11% over the previous year. First-time buyers accounted for 33% of the existing home sales, whereas 14% of the homes were lapped up by investors. Distressed sales were just 1%. What’s interesting is that almost all the existing homes got sold off within 21 days from the date of putting them up for sale in 2020, as compared to 31 days, year over year.
Mortgage applications continued to rise in September 2020, with refinance applications forming 64.3% of the total number of applications. Based on all the available data, September 2020 should report strong numbers. I also estimate that this month October 2020 will be no different.

Existing Home Inventory

A month’s housing supply in the U.S. is measured by the ratio of the number of houses up for sale to the number of houses sold. This ratio suggests how long the current for-sale home inventory will last, assuming that no new homes are added to the inventory during this period. In August 2020, the month’s supply dropped sharply to 3.3, indicating that the existing home inventory would last for 3.3 months.

In September 2020, the national housing inventory declined by 39% over the previous year, and the median listing price rose to $350,000. These numbers imply that NAR will report bullish data for September 2020, and the bullishness is likely to spill over to October 2020.

Pending Home Sales Data
NAR also reports data on pending home sales, i.e., the number of homes whose sale is finalized by signing a contract but the transaction is yet to close. As of August 2020, pending home sales rose 8.8% month over month and 24.2% year over year. It was a record high and reflective of the competition to grab homes among buyers and investors. This data indicates that pending home sales are likely to rise.

New Homes Construction Data

Privately-owned housing unit construction activity was going on at a steady but brisk pace in September 2020. About 1.47 million permits were issued and construction started for 1.42 million houses. Housing completions were 1.23 million. So, the data suggest that new housing activity is also likely to buzz around in the near future.

A Few Listed Homebuilders:
(1) D.R. Horton (DHI): The company is the largest public homebuilder in the U.S. and its profitability stands out amongst its peers. A TTM EBIT margin of 13.44% versus a sector median of 4.85% and a TTM net income margin of 10.82% versus a poor sector median of 1.61% confer it the status of an outperformer.
Though it has been running up on the charts, its Forward P/E (GAAP) is just 13.29 versus the sector median of 25.75. DHI is efficiently managed and has been reporting positive operating cash flows for many years now – another bullish factor.
(2) Lennar Corporation (LEN): The company has consistently reported good numbers and is inching its way into investment-grade territory. After beating Q2 2020 EPS and revenue estimates by $0.54 and $339 million, respectively, the company has received 16 up revisions from analysts. A low Forward P/E of 11.37 and a low Forward Price/Sales of 1.18 suggest that the stock price has scope to increase.
(3) PulteGroup (PHM): Another big beneficiary of the housing boom. Though some analysts consider it pricey, the valuation numbers suggest otherwise. A low Forward P/E (GAAP) of 11.37 and a low Forward Price/Sales of 1.25 suggest that the stock still has room to grow.
PHM has been reporting positive operating cash flows since 2016 and the stock looks bullish in the near term.
(4) NVR (NVR): This is another outperformer.

Summing Up
Falling home inventories, rising prices, increase in mortgage applications – these are very bullish data. Also, so long as the Fed holds rates near zero percent, mortgage rates will remain low and home sales will rise until they reach a point when demand is satiated. Then, economic fundamentals will catch up and the wheels will turn.
The data I’ve given you above suggest that until fundamentals catch up, it’s all going to be home, sweet home for home builders.
Short-term investors and traders can hop on to stocks of home builders, construction equipment suppliers, and other listed companies that are connected to the home-building industry. The way to play these stocks is to consult charts and look for bull and bear triggers. And, dig up profits so long the bullish construction on the charts peters out.

- S.D.

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