Last night, before going to bed, I saw the S&P Homebuilders Index (XHB) was up over 8% in after-hours trading.
This morning, I checked and the Index was holding up over 4%!
Why the jump?
That’s after the NAHB and Wells Fargo released worse than expected housing data showing the effects of the shelter-in-place orders are having on the housing market. Their preliminary report for April reading is gloomy, to say the least, as they forecast an almost 60% drop in the index – the largest single-month change in the 35-year history of the index.
Also released, the U.S. Department of Commerce reports that home-building starts fell 22% in March – the worst monthly decline since 1984.
So, if the data was so bad this week, why is the stock not dropping?
Why is it holding its price that’s only down -28% year to date?
Why is it UP 33% from the low of Late March? (The S&P500 is only up 26% from its lows).
I think it’s because of underlying differences in the market and the economic conditions:
Inventory - for example, was already at a low spot going into the Covid-19 pandemic, with January of 2020 mirroring the numbers from 2012 when they started tracking these numbers. In fact, two of the top three worst inventory areas were here in California (San Jose and San Diego). This is the opposite supply and demand problem we experienced in 2008. Unlike the financial crisis, we won’t be seeing half-built ghost towns in this pullback, or likely not even this decade.
“Homebuyers took advantage of low mortgage rates and stable listing prices to drive sales higher at the end of 2019, further depleting the already limited inventory of homes for sale. This is a challenging sign for the large numbers of Millennial and Gen Z buyers coming into the housing market this homebuying season as it implies the potential for rising prices and fast-selling homes—a competitive market.” Said Danielle Hale, Realtor.com’s chief economist.
Lower interest rates – The federal funds rate dropped to 0%-0.25%, the 10yr Treasury Note is trading at roughly 0.6%, and the average mortgage rate for a 30-year fixed is 3.29%. Furthermore, Market Watch economists agree that under normal circumstances, the rate could drop to as low as 2%.
Demographics – “In our immediate future, we have demographics on our side. We are in the early stages of the most prominent pro-housing demographic patch ever recorded in U.S. history. The number of Americans ages 26-32 is massive, much bigger than the total population of a lot of countries.” According to Housing Wire.
The worst is likely over – not only in regards to the virus, which is showing signs of peaking and now slowing, but also in terms of economic data. Although we're near 20% unemployment nationally, it’s widely understood that the majority of those workers are more or less furloughed for the time being and will be called back to work when the shelter in place orders are lifted. With the Paycheck Protection Program (PPP) running out of money after only two weeks, small businesses are forced to furlough their workers and push that burden onto the unemployment insurance system. When the gyms, restaurants, hair salons, and shopping centers open again, they’re likely going to call back the majority of the already trained employees they furloughed a month ago.
“While new monthly economic data are driving markets lower this week, they are a lagging indicator and should be priced in already. Real-time daily economic activity metrics suggest that the economy will likely not decline much further” said Sam Khater, Freddie Mac’s chief economist, in Thursday’s report.