Given the market selloff, I’ve seen a lot of doom and gloom articles on buyers’ appetites for homebuilding. Will buyers still show up to buy a home with COVID-19 going around? What will the impact on interest rates have?? All of this makes me wonder if Homebuilder stocks have reached attractive levels…
Check out these headlines:
- Plunging Mortgage Rates Might Not End U.S. Housing Doldrums
- Best Housing Market in a Decade Could Succumb to Coronavirus
- Can the Housing Market Withstand the Coronavirus?
All these headlines essentially result in one thing… Agh! Panic!
Since most people hold a majority of their net worth in a home, these headlines draw eyeballs.
But let’s think about this for a moment. Yes, the coronavirus may impact my willingness to go out to eat. To ride the subway. To cheer on my favorite team at a sports bar (looking at you March Madness).
But is it going to cause me to stop buying a house? Especially when credit is readily available and interest rates just hit all time lows for a mortgage?
I personally have trouble seeing it. And so far, we aren’t in quarantine and the data has been supportive:
- Redfin noted in early March, “Demand is still growing at surprisingly healthy levels. And growth in the number of people submitting offers is much higher.”
- Even at ground zero for coronavirus in the US, Seattle, they noted, “Now coronavirus fears have spread from Seattle to other parts of the country, but we haven’t seen a big impact on home-buying demand yet.”
- Hovnian, a national builder, had a lot of positive things on its results call:
- Talking about reported results:
“Some may say that the strong increase was against an easy comparison last year. I’m pleased to say we were also up 33% compared to the first quarter of 2018. Additionally, our sales pace was the highest level of contracts per community for any first quarter since 2005. It’s clear that the housing market is rebounding and demand for our homes continues to gain momentum.”
- Regarding the virus impact specifically: “Sales feel particularly and perhaps surprisingly steady and solid”
At the very least, those that own a home can refinance and keep some more cash in their pocket each month.
At the same time, we’ve been underbuilding in this country since the downturn. While we overbuilt in the last downturn, we’ve been growing as a country (creating new households) but new starts haven’t kept up. We were just now getting to mid-cycle levels before coronavirus caused a drop off.
I think this will lead to pent up demand when we come out of this which will support Homebuilder stocks
I personally am looking at the homebuilder equities. Toll brothers and Lennar are trading just above 1.1x BV. These are companies that have cleaned up their balance sheets and are generating ~13% ROEs. That seems cheap to me. Toll has also been buying back stock like its nobody’s business. This could even be a shot to buy NVR, a great blue-chip.
Could we see a pause? Sure. But I think the longer-term fundamentals are strong and that this virus won’t impact their intrinsic value.