The divergence of opinion on US housing between markets and industry is 180-degrees

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There is a complete disconnect between what market participants are screaming about US housing and what the people in the industry are saying.

If you listen to economists and traders, the US housing market is on the verge of collapse. Rising rates are set to cause a 2008-style collapse in pricing and a total unwind of the 40% increase in home prices since the start of the pandemic.

But when you listen to home builders, contractors and realtors, demand is still solid.

Home Depot reported record revenues and earnings today, while affirming its guidance.

“Our customer has been incredibly resilient,” executives said on the call. “We have not seen a broad-based deterioration in our consumer.”

Mike Simonson, who is one of my favorite real estate analysts, yesterday delivered a cautiously optimistic take noting that US homes for sale are still far below the historical norm.

Home Depot affirmed the positive long-term trends that they and home builders have repeated for months:

  1. US housing stock is old and needs updating
  2. There have been years of under-building coming out of the housing crisis
  3. US household formation is increasing as millenials hit that demographic sweet spot
  4. People are spending more time at home and want space to enjoy it

D.R. Horton, which is the largest US home builder, said this is the second-best market it’s ever seen for home builders. The best was last year and obviously it’s slowing from that frenzy but it’s still at a very healthy level.

Yet the most commentary remains deeply — almost agressively — negative.

It’s not just commentary either. Home builders are trading at distressed multiples.

I don’t know what’s happening here but the divergence is intense. I have some theories:

1) Generals fight the last war

People like to draw parallels and the 2008 housing crisis is still fresh in everyone’s mind. When they see a recession, they see a housing collapse. That ignores that it was leverage and lending that triggered the crisis and that lending standars are now tighter than ever.

2) Demographic noise

Most commentary online is from young, urban people. That creates a bit of an echo chamber and it reflects anger from those who missed the housing jump or couldn’t afford buying to begin with. That’s been compounded by rising rents and broad inflation.

3) There are two US consumers

Home Depot executives today were asked to outline how it was possible that they’re seeing such a strong consumer and other metrics are slipping. They laid out a theory that resonates. They said their customers are generally home owners not renters. Home owners have benefitted from house price appreciation and have excess savings from the pandemic. Renters, meanwhile, didn’t get any kind of windfall and are now being squeezed.

So the gulf between the home owning ‘haves’ and the renting ‘have nots’ is widening. Higher interest rates are also making it harder for renters to join the club while private equity continues to buy up supply. At the same time, rising rates and supply chain issues are keeping home builders cautious so inventory can’t rise.

For me, the linchpin will be interest rates. If the long-end can stay sub-4% (30s at 3.15% currently) then I think housing will pick up again. If the Fed is forced to hike rates to 5-6% then all bets are off. But even if rates get that high then I think the economic damage would be so severe that they would be cutting right back to sub-1% in short order and igniting another boom.

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