The Anti-Housing Crash Storyline: Houses, Houses Everywhere … But Not Enough to Buy
But there is an investable opportunity ...
Robin and I bought our house more than 20 years ago – just a couple of months before we got married. And we got a heck of a deal.
We knew it then.
And we know it now.
Market estimates say our home has nearly tripled in value in the time we’ve owned it – more than double the rate of general inflation. Heck, that estimated market value has increased nearly $30,000 just since the start of the year.
And I also know that those market estimates (what the Zillows and Redfins are saying) are super conservative. Why can I say this?
Very simple: Our search for the Patalon Family “dream home” is now at five years … and counting.
Because I’m a consumer, investor and homeowner myself – at the same time I’m watching and writing about these very same topics – I sometimes imagine myself as a kind of “embedded journalist” during wartime. In this particular skirmish (the battle to find a new house) the threats aren’t bullets, missiles or bombs … they’re inflation, interest rates and a shortage of houses for sale.
It's not a perfect analogy, I know. But I really do feel like I’m watching (and fighting) a drawn-out skirmish. Robin and Joey (in tandem with our longtime broker) act as the “advance scouts: They reconnoiter the online ads and open-house notices. Then the three of us pick out the ones worth perusing and do it together.
With each house we looked at, there were more prospective buyers than I’d ever seen.
Those sales turned into frenetic auctions – often supercharged by real estate agents who started the bidding low, knowing that emotion and short supply would ignite a bidding battle that would end with a sales price far north of any projected market value.
That’s how I know my house is worth more than those estimates.
And I also know that – despite some ominous predictions of a housing-market collapse – we’re looking at a “seller’s market” … for some time to come.
That upbeat view was reinforced by the recent Home Depot Inc. HD 0.00%↑ decision to spend $18.25 billion to buy SRS Distribution, a building-materials supplier with a focus on the professional housing market. It’s the biggest acquisition in Home Depot’s history. And because it was triggered by many of the same catalysts that have vexed the Patalon family house search, it spotlights some reassuring (and potentially wealth-building) realities about the American housing market.
Despite its recent struggles – which paralleled the recent housing slowdown – Home Depot has been a historically well-run company. So the SRS deal shows that Home Depot’s top brass sees the housing market landscape the same way I do.
Here’s why I’m sharing this personal look at America’s housing market. One of our mantras here is: “Find the best storylines … and you’ll find the best stocks.” So here in today’s Stock Picker’s Corner (SPC), I’ll use my own real estate “story” to explain why extremist calls for a housing crash are, well, extreme.
And, in fact, wrong.
Indeed, I like the U.S. housing market’s intermediate-term outlook. And I’ll show you why.
And, as an added bonus, I’ll show you a way to capitalize on that upbeat outlook by spotlighting a housing-related, Wealth-Builder dividend play with a 13.5% yield.
Prices, Prices Everywhere … And None of Them Are Low
If you look at the American housing market over the last two years, you’re talking about a moribund tale – a sales slump triggered by a lack of homes for sale and the solar-plexus punch of climbing mortgage rates. Home sales plunged 18.3% last year, Redfin reported.
But if you pan back and give yourself the five-year view, you’ll find yourself looking at the same “Whac-a-Mole” inflation that just keeps malleting American consumers.
Prices have zoomed in food, insurance, utilities … and housing. The median sales price of new U.S. homes has soared 29.4% during that span – reaching $417,700 in the fourth quarter, says the Federal Reserve Bank of St. Louis.
And that struggling stretch from last year that Redfin talked about? Thanks to a modest easing of mortgage rates, sales of existing (previously occupied) U.S. homes rose 9.5% from January to February – the strongest pace in a year. But inventory rose by 5.9% from the prior month, data from the National Association of Realtors shows.
In our own search, Robin and I have tried to act as the smart investors I believe us to be. The truth is … we can “afford” the houses we’ve looked at. Without having to borrow. But Joey will soon head off to college. We’ll eventually retire – and have some pretty cool plans for when we do. So like “smart investors,” we regarded the houses we were looking at as “financial assets” (as well as potential domiciles) – and refused to overpay.
And like smart investors, we hedged our bets. So even as Robin, Joey and I toured dozens and dozens (and dozens) of houses, we upgraded our current house – adding a sprawling new deck, a really nice new kitchen, a nice flagstone patio with a sitting wall and a character-adding portico. And, last year, a nifty bit of landscaping.
But what we really wanted to add was a standalone building with a workshop, two-bay garage and a second-story office for me.
Those plans were waylaid by the COVID-19 Pandemic, and a stampede of families with similar plans who put the squeeze on available contractors and drove the project cost into the stratosphere. Some family issues came along, too (as they so often do) – and that Patalon family “Bill’s office-garage”initiative got shelved.
We’re playing the “long game” – again what smart investors do. And we’re standing pat … for now.
So what comes next?
After all, it’s the “what comes next” that separates the Wealth Builders from the Wealth Killers.
And barring a “black-swan event,” what comes next is bullish.
But some extreme market mavens are calling for another U.S. housing crash.
A crash? I just don’t see it.
And I’ll give you a six-pack of reasons why …
Six Bricks That’ll Make Housing Strong
Indeed, there are six reasons to feel good about the American housing market in the next few years.
Brick No. 1: Building Didn’t Come All the Way Back: After the late 2000s housing crash, and the Great Financial Crisis that followed, homebuilders never really got back to build at the rate they did in the early 2000s. Compass Inc. COMP 0.00%↑ CEO Robert Reffkin just told Yahoo! Finance that U.S. housing inventory as we enter the “spring selling season” is 26% higher today than a year ago. However, he conceded that inventory remains 40% below pre-pandemic levels. That’s absolutely true where we live: Heck, Robin and I even considered buying (and sitting on) a nice lot until we were ready to build – but most of the buildable land in our area has already been developed … or is in the hands of builders.
Brick No. 2: There’s Not a Lot to Buy: We all know that real estate story is about “location, location, location.” Where I live in the Greater Baltimore Area, so-called housing “inventory” seems lower than ever. The low rates that held sway for years before the U.S. Federal Reserve’s rate-boosting campaign of 2023 and the pandemic cash infusions didn’t help us, either. All that mixed together kept demand (and turnover) high. Nationally, a “balanced” housing market means there’s a six-month supply of housing for sale. In early 2022, that was 1.7 months. In February, that number was just 2.9 months, says the National Association of Realtors (NAR). So demand will continue to outstrip supply.
Brick No. 3: New Buyers Keep Coming: Tastes and needs change. With clothes. With cars. With houses. After the pandemic, when the work-from-home culture took over, lots of families found themselves in the same spot as Robin and me: Two adult professionals both working from home equals tight quarters, meaning more space – or better-configured space – is needed. And that usually means a new (or different) house. And the demographics are changing, too: Millennials – folks currently aged 27 to 42 – have leapfrogged baby boomers to become the largest buying group (38%). And home ownership among U.S. Asians and Hispanics has hit a new peak, at 63.3% and 51.1%, respectively.
Reason No. 4: This is No “Speculative Mania:” I’ve lived through speculative stretches – in stocks, housing and baseball cards, to name a few – so I know what they look like. Right after we bought our house back in 2000, a dramatic cut in rates ignited a frothy stretch where Americans used their homes as “ATM machines” – pulling out cash for cars, boats, big vacations and second homes. And we saw it again in the middle 2000s, when credit-default swaps created a massive appetite for mortgages, not homes, so the tail ended up wagging the dog. But lenders learned – and have been stricter this time around: At the end of last year, the median credit score for new mortgage applicants was a stout 770, says the Federal Reserve Bank of New York. In 2020, in the depths of the pandemic, foreclosures hit record lows, says BankRate.com. The typical homeowner of today has amassed an impressive level of home equity.
Brick No. 5: Meet “Mr. Mortgage Lock:” Mortgage rates zoomed to 8% back in October – a 23-year peak. Even after the 20% down payment (a higher dollar value given today’s higher home prices), high rates have added more than $100 to monthly payments year-over-year. A December analysis by Realtor.com found that two-thirds of all current mortgages have rates below the 4% level. That creates something some real-estate economists refer to as “mortgage lock” – or what you and I might refer to as “reinvestment risk.” In other words, folks who bought a house years ago feel like hoarders sitting on that low rate – and are loath to give it up. And while those folks know they’ll make money on their current house, they also understand that they’re looking at buying a more-expensive house – and that they’ll have to borrow at probably double the rate to do so. Indeed, RE/MAX Founder Dave Liniger told BankRate that, thanks to high rates, “you’ve got an entire generation of pent-up demand. We’re in this fascinating position of tremendous demand and too little inventory.” The upshot: The end of “mortgage lock” would send buyers “flooding into the market” – elevating home prices even more.
Brick No. 6: Team Powell Will Cut Rates (Eventually): While across-the-board prices are much higher today than they were five years ago – and are unlikely to go back – inflation is cooling. It’s down from its peak rate of 9.1%, but is still above the Fed’s target rate of 2%. At some point, the central bank will start pruning rates. And that will ignite the housing market as rates and payments fall. According to Experian, if rates fall three-quarters of a percentage point, you could save $750 a year for every $100,000 you borrow. That’s $22,500 over the life of a 30-year loan. Inflation has fallen significantly from a peak of 9.1% but it remains more than a percentage point higher than the Fed's target rate of 2%. In that afore-mentioned Yahoo! Finance interview, Reffkin, the Compass CEO, said that “the Fed lowering rates will do more for the real estate market than anything else. That’s the biggest bottleneck.” If there’s a “magic number” – where mortgage rates need to be to unlock “mortgage lock” and stoke demand even more, it’s probably in the high-5% range, or perhaps 6%, down from the 8% peak of last year.
Wealth Building Income
Income is a grievously overlooked component of being a Wealth Builder. And we’re talking about income thought of as “cash flow” – meaning you’ll outpace inflation, market interest rates and even the tax bite.
And one housing-related income play that can do that for you is Annaly Capital Management Inc. NLY 0.00%↑, a New York, N.Y.-based mortgage REIT that’s got a track record of being well-managed. Annaly invests in such securities as:
Agency mortgage-backed securities collateralized by residential mortgages.
Non-agency residential whole loans and securitized products within the residential and commercial markets.
Mortgage servicing rights … and more.
Now, I’m intentionally oversimplifying this – make sure you do your own research before you invest. As a residential mortgage REIT, Annaly invests in the loans that finance the properties, versus the physical homes themselves.
And as a mortgage REIT, Annaly has to pay out 90% of its taxable income to shareholders. At a recent share price of about $19.20, Annaly’s projected forward dividend of $2.60 a share equates to a yield of 13.5%.
There are risks, of course – there always are. A recession would be an intermediate-term wild card – but one that rate cuts would soften or reverse outright. And any erosion of the financial strength of the American consumer would inflict damage, too.
But at a point when credit quality is high, home equity is strong, rates are expected to fall and loan demand is projected to rise, Annaly is an income play that’s worth a closer (and careful) look.
See you next time …
