The Housing Market Is On Fire... But We Don't Need No Water

For the past six months my wife and I have been looking for a house to buy, and boy let me tell you, it's been rough.

Every house we see feels overpriced. And yet they're being sold within a day or two of being listed. 

Our realtor regularly regales us with horror stories about bidding wars that result in buyers offering more than $10,000 over asking price and still losing.

No doubt, it's a terrible time to be buying a house, but a great time to be selling one. 

This trend was predictable as the supply of new houses has been dwindling for the past decade, just as more millennials prepared to enter the market.  But the Coronavirus has further exacerbated the situation, forcing people to reevaluate their accommodations. 

No question, remote work will be here to stay, reducing the number of trips commuters make to their respective offices, and making proximity less of a factor. It's also created a desire for home offices and more space in general for families to spread out. And multi-generational homes, in which parents and grandparents cohabitate, are on the rise, as well. 

At the same time, the pandemic has potential sellers holding firm onto their current properties. And historically low mortgage rates are extremely enticing.

But again, this is all just amplifying a larger trend that was already emerging. 

As I said, housing inventory has been dwindling for a while now. 

So much so, that at the end of July there were just 1.3 million existing single-family homes for sale, the lowest count for any July in data going back to 1982, according to the National Association of Realtors. 

With that sales pace, there were 3.1 months of total existing-home inventory left in the market at the end of the month, down from 3.9 months in June and 4.2 months in July 2019, according to NAR.

And in September, Zillow Group reported total for-sale inventory was down 29.4% from a year earlier, languishing at its lowest level in three years. 

Demand, though, is headed in the opposite direction.

As inventory evaporated in September, existing-home sales hit a 14-year high.

And prices have been on a tear, as a result.

The Case-Shiller National Home Price index has gained in excess of 6% per year on average since January 2012. 

But now things are really taking off...

Home prices seem as overvalued as they were in the spring of 2005, nine months before the massive peak that presaged the financial crisis.

Or, to put it another way, with the price points we have right now we're experiencing the second-biggest residential housing market in history — a market somewhere between $3.4 trillion and $3.9 trillion.

Homebuilders are now racing to catch up.

Housing starts rose 4.9% to a seasonally adjusted annual rate of 1.530 million units in October, the Commerce Department said on Wednesday. And data for September was revised up to a 1.459 million-unit pace from the previously reported 1.415 million.

Meanwhile, building permits, a good barometer of future activity, came in at 1.55 million annualized units in both months. That's up 2.8% from last year, and suggests the home building spike is on track to continue. 

And mortgage applications were up 4% last week, which says a lot because November isn't typically a busy month for the industry. In all, volume was a decisive 26% higher annually.

So this is a significant trend that has legs. 

It bodes well for home builders like Lennar Corp. (NYSE: LEN) and especially Home Depot (NYSE: HD).

In fact, Home Depot just reported a 24% increase in net income for the third quarter, while net sales rose 23% to $33.54 billion. 

The company also announced this week that it will re-acquire HD Supply — a former unit and one of North America’s largest industrial products distributors — for $8 billion. 

I guess if I can't find a house, capital gains are the next best thing.

Fight on,

Jason Simpkins

@OCSimpkins on Twitter

Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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