Source: Seeking Alpha —
Introduction
I recently wrote an in-depth article on the housing market and home builders in the United States. While we will also discuss the core message in this article, the main takeaway is that major buyers are waiting until unemployment is elevated. At that point, the Fed will have to lower rates, providing a competitive environment for large buyers to outbid the public. I believe this could mark the start of a new massive bull market for home builders and related stocks. In this article, I present one investment idea that should be on everyone’s watchlist. The D.R. Horton (NYSE:DHI) company is a Southern homebuilder with exposure in undersupplied markets. The company is also the largest homebuilder in the United States, focusing on affordable housing – the exact market that needs more supply.
Right now, the company is seeing falling orders, which are being offset by higher selling prices. I believe the pricing tailwind is fading, causing downside risks to rise.
However, instead of shorting the stock, I urge investors to watch this ticker like a hawk in 2023, as we might get attractive buying opportunities.
So, let’s look at the details!
Housing Weakness Is Worsening
There’s some good news. Over the past two weeks, mortgage rates in the United States have dropped by 47 basis points. That’s the biggest two-week decline since the housing crisis, pushing the average 30-year fixed mortgage rate to 6.67%.
This allowed mortgage applications to rise, yet demand remains depressed. The index of refinancing activity remains close to a 22-year low.
Moreover, the number of new single-family homes sold in the United States rose by 7.5% in October (versus September). The number came in at 632 thousand, which is above the median estimate of 570 thousand.
Unfortunately, the rise wasn’t *that* good news. The upswing was mainly caused by higher demand in the South, as Florida, parts of Georgia, and South Carolina rebounded after several hurricanes.
As reported by Bloomberg:
Even with the surprising pickup in sales, buyer demand has rapidly evaporated this year amid the Federal Reserve’s aggressive interest rate hikes to tame inflation. Mortgage rates, which topped 7% by the end of October, have more than doubled this year. That’s put a brake on sales and construction while also helping to push down home prices.
As I wrote in my most recent article (mentioned in the introduction), things aren’t looking good. Homebuilder sentiment is now at 33 after 11 consecutive monthly declines. We’re now back to 2012 levels. Back then, it marked the start of the housing recovery.
This is the comment the NAHB (National Association of Home Builders) gave when it published these numbers:
“Higher interest rates have significantly weakened demand for new homes as buyer traffic is becoming increasingly scarce,” said NAHB Chairman Jerry Konter, a home builder and developer from Savannah, Ga.
[…] “To ease the worsening housing affordability crisis, policymakers must seek solutions that create more affordable and attainable housing. With inflation showing signs of moderating, this includes a reduction in the pace of the Federal Reserve’s rate hikes and reducing regulatory costs associated with land development and home construction.”
That’s no surprise, as people aren’t buying homes anymore. High inflation, falling economic growth, a hawkish Fed, and other reasons have pushed home-buying sentiment to levels not seen since the 1980s. Back then, the Fed was also hiking into a supply-driven inflation uptrend and economic weakness.
As a result, home builders are receiving a lot of cancellations. The most recent numbers show a surge to 25.6% in October. That’s almost 10 points above the COVID peak when nobody knew what the future would look like.
The worst thing is that prices are still high. That’s bad because this is hurting affordability even more. Homes are still expensive, yet now mortgage rates are higher.
Hence, large buyers are now waiting for the perfect moment as the only thing that is now able to crash prices is higher unemployment. As I wrote in my most housing article:
The big operators in the industry know this. And they are taking advantage of the situation. In the third quarter, 17.5% of all homes sold were sold to investors. That number is set to rise again as homebuilders are looking to sell unsold inventory in bulk to rental landlords.
JPMorgan (JPM), for example, put together a $1 billion fund to buy up homes with rental landlord Haven Realty Capital. There are many more examples of this.
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