Home Ownership Under Fire - InvestingChannel

Home Ownership Under Fire

Proprietary Data Insights

Financial Pros Top Home Improvement Searches This Month

#1Home Depot279
#3Floor & Decor29
#4Lovesac Co.11
#5Lumber Liquidators3

Renovations are Timely

Despite recent pullbacks, home remodeling retailers including Home Depot (HD) and Lowes (LOW) are well positioned to take advantage of sellers remodeling and upgrading properties to cash in on higher home prices.

As we discuss in our main story, home inventory sits at some of the lowest levels in years.

With prices continuing to rise, even in the face of pending rate hikes, home owners are being incentivized to upgrade their properties to take advantage of the boom.

After Home Depot’s recent quarterly results, shares crashed almost 9% in a single day. Since December, shares are off their high by more than 25%.

To be fair, both face inflationary pressures as their supply chain costs continue to rise.

However, those appear to be lower than the trajectory of home price growth, which should pad margins.

That’s not to say that shares of either retailer can’t or won’t drop further.

Both carry price-to-earnings ratio (P/E) ratios nearly 30% (LOW) to 50% (HD) the consumer discretionary sector.

However, a broader market selloff could bring shares of these retailers into a discount range.

So make sure to put these on your watchlists.


Home Ownership Under Fire

Key Takeaways

  • Loan applications for home purchases are starting to decline in the face of higher rates.
  • Buyers continue to struggle in the housing market facing historically low affordability.
  • Rising home prices and rents continue to outpace wage inflation, eating away at real discretionary income.
  • Once the Fed hikes rates, high-end home buyers are likely the first to pull back to more affordable price brackets.

It’s already a foregone conclusion the U.S. Federal Reserve will hike rates by 0.25%-0.50% at their March meeting.

We’re starting to see signs of the housing boom finally slowing. But not because the situation has improved.

Loan Applications Plunge

A reading from U.S. home loan applications dropped to its lowest levels since the end of 2019.

With treasury prices falling, the yield on the 10-year U.S. treasury bond, which is often tied to mortgage rates, has climbed to its highest levels since the end of 2019.

Loan applications for purchases fell 10% to the lowest reading since mid-August.

However, refinancing cratered 17% after a 15.6% drop the month before.

Housing Affordability Declines

Not only do homebuyers face higher interest rates, home prices have skyrocketed.

That’s made home affordability worse than any point in the last three years outside of June, 2021.

The situation isn’t expected to improve anytime soon.

Right now, we have less existing single family homes available for sale than any point in the last three years, and they’re drastically lower than 2019.


And that’s despite the fact that home prices are up 9.2% compared to last year, although thankfully, they are down 1.2% from December.

Rental markets were up 15.2% in January versus 2021 and 0.7% month over month.

Wage increases haven’t kept pace with the staggering rise in cost, leading to declines in real income (wage increases – price increase) of anywhere between 5%-10%.

The Bottom Line: Inventory of single family homes continues to constrain the broader housing market. The same goes for rental markets.

Fed rate hikes will likely need to pass 2%-3% before they have a meaningful impact on home buying simply because of the inventory shortage.

The first homebuilders that will be impacted would be high-end builders like Toll Brothers (TOLL). Community builders like Beazer (BZH) should continue to see strong demand for several years.

Want to get content like this directly to your inbox? Then we urge you to sign up for our newsletter here

Related posts

Advisors in Focus- January 6, 2021

Gavin Maguire

Advisors in Focus- February 15, 2021

Gavin Maguire

Advisors in Focus- February 22, 2021

Gavin Maguire

Advisors in Focus- February 28, 2021

Gavin Maguire

Advisors in Focus- March 18, 2021

Gavin Maguire

Advisors in Focus- March 21, 2021

Gavin Maguire