The First Year Is The Hardest - InvestingChannel

The First Year Is The Hardest

Proprietary Data Insights

Top Homebuilder Stock Searches This Month

#1DR Horton8,462
#3Beazer Homes USA6,610
#4M/I Homes4,103
#5KB Home3,403
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The First Year Is The Hardest

Homebuilder stocks continue to garner increased interest in Trackstar, our proprietary sentiment indicator. 

For example: 

  • Investor interest in #3 Beazer Homes USA (BZH) surged 65.2% week over week. 

At the same time, these names have crushed the stock market over the last six months. Check out how today’s Trackstar top five have performed during this time frame:

  • DR Horton (DHI): +30.5%
  • PulteGroup (PHM): +54.8%
  • Beazer Homes USA (BZH): +122.7%
  • M/I Homes (MHO): +68.0%
  • KB Home (KBH): +47.0%

Why is this happening? It’s pretty straightforward, actually. Super high mortgage interest rates (the 30-year is still around 7%) are stopping people locked into more favorable mortgages from selling. The supply glut of existing properties means more demand for new homes, which means potentially more business for the homebuilders.

Something that’s not so straightforward. How this and other factors continue to contribute to one of, if not the most unaffordable housing market in our nation’s history. We hammer housing at The Juice because we think it’s one of the biggest issues our generation faces. And, with every bit of data we see, we wonder if the situation will only keep getting worse. 

For example …

The latest data from the fantastic Black Knight Mortgage Monitor confirms something The Juice predicted twice in January. 

First, in a January 2023 installment where we suggested taking a look at homebuilder stocks: 

Homebuilder stocks have crushed it over the last six months. 

We think it’s a textbook example of the forward-looking stock market. The idea that investors often value companies based on what we anticipate will happen. That means future bad news is often already priced into stocks …

Maybe not all the bad news, but the worst news is likely behind the housing market. This view might be one reason homebuilder stocks have surged in the second half of 2022 and the start of 2023 after tougher times during the first half of last year.

We followed up on that narrative again in January 2023 when we predicted the housing market – we’re talking about housing prices here – would roar back into record territory in 2023. 

And, if you believe Black Knight (obviously, we do), The Juice was ahead of the curve. 

Here’s the lowdown Black Knight’s directly most recent report (bold emphasis added): 

As Black Knight Vice President of Enterprise Research Andy Walden explains, backward-looking annual home price growth rates are beginning to inflect driven by the seasonally adjusted monthly increases the Black Knight Home Price Index (HPI) has been tracking in near real time as 2023 has progressed.

“We’ve been noting for some months that the recent rate of home price gains would have a lagging, but significant, impact on the annual rate of appreciation,” said Walden. “Well, June marked that inflection point. Not only has the Black Knight HPI reached a new record high – on both seasonally adjusted and non-adjusted bases – but 60% of major markets have done so as well. After slowing for 14 straight months, the annual growth rate jumped back to 0.8% in June, up from just 0.2% in May, amid widespread growth that saw annual rates of appreciation inflect and begin to trend higher in more than 80% of markets.

If you put two and two together, you see where we’re headed. 

Even if interest rates do manage to come down, as buyers step off of the sidelines, demand will offset, if not absolutely crush any increased supply. This is precisely when all hell will really break loose in the housing market. Prices will soar, especially in traditionally expensive and competitive markets. 

So, yeah, we’re probably – no, screw that – we think we’re definitely in the most unaffordable housing market ever. 

Tack this crazy datapoint onto the Black Night numbers. 

  • Point2Homes did some research that shows it would take prospective homeowners in the nation’s 100 biggest markets 4 to 24 years of saving to cover the first year of home ownership. This includes a 20% down payment, closing costs, mortgage payments, insurance and property taxes. 
  • The first year is easiest in Detroit, where home ownership costs $25,100 in year one, followed by Toledo ($38,008) and Cleveland ($38,569). 
  • The first year is hardest in San Francisco, where home ownership costs an insane $389,910 in year one, followed by Fremont, CA ($389,151) and San Jose ($388,731). 

The distribution between the extremes plays out similarly to the one we outlined yesterday in The Juice, which showed how much house you’d get if you swapped a rent payment for a mortgage payment of an identical amount in the same city. 

The Bottom Line: We’re not going to lie. We like to be right. However, we don’t like to be the bearer of bad news. We’re much happier talking about stocks we like that did well. 

That said, there’s a two-fold reality at play. 

Fold #1: If you’re an investor, there’s usually a stock or sector to buy amid any type or crisis. Amid the housing affordability crisis, homebuilder stocks have been one source of profits over the last year. 

Fold #2: If you’re a person in the housing market – as an owner or renter, particularly one on the sidelines – you can’t hide your head in the sand. It’s better to keep up on the cold, hard realities of this situation. It can help you try to make sense of a definitely complicated and potentially painful situation.

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