The Housing Market Still Has the Blues. Will Spring Bring Sun Shine?

“You left me nothing, baby, but the bill and the blues.”

Image of Joe Bonamassa courtesy of wallpapercave.com

One of my favorite guitar players is Joe Bonamassa, whose stylistic phrasings and subtle modernization of the venerable art form of the blues have breathed new life into the genre. Among his least appreciated, but accessible hooks is; “you left me nothing, baby, but the bill and the blues,” which in a way describes what’s happened in the housing market over the las four years, as some have been left with underwater mortgages while others can’t find affordable places to live.

Where Have I Been?

If you’re wondering why my musings on the real estate market are less frequent, just look around or pay attention to the data, and you too may get the blues. For instance, in January existing homes sales, new home sales, and pending home sales all hit new lows. But, my old days of trading commodities and futures (I even wrote a book on the subject) are still part of my DNA, so I can’t resist hanging around a market where supplies are tight and demand remains high; even if investors are being confounded by external factors (high mortgage rates and high asking prices).

So…Yes, I’m still following the homebuilder stocks. I still stubbornly, and painfully in some cases, own small lots of several of them in my own account and have recently recommended one in particular at the Smart Money Passport, on which I expand below. And yes, I still make my rounds around town to keep up with the market in real time.

But what I’m seeing on the ground is not very encouraging. Aside from the monthly data, most homebuilder earnings continue to show a significant slowing in business. Certainly, the big guys are selling houses; enough to make money on a quarterly basis and to stay in business. But even when they beat (lowered) analyst expectations, their guidance trumps any hope for future growth and their already depressed stocks failed to bounce. Sadly, if there is an initial bounce after the report, it usually fades within a day or two.

Inside the earnings reports there are consistent findings:

• Shrinking margins;

• Flat to decreasing orders;

• Falling backlogs; and

• Flat future guidance at best.

One exception has been Green Brick Partners (GRBK), in which I own shares and which I’ve recently recommended. Green Brick just delivered another record quarter, quietly expanding its sales, revenues, profits, and margins. Its secret is that it concentrates in the areas of the U.S. where there is growth, the Southeast and Texas, with most of its activity of late concentrated on the latter. Indeed, Green Brick’s success validates the notion that the steady migration out of high tax, high regulation states remains in place and that a well-managed company can flourish during difficult times.

The price chart speaks for itself. Over the last few weeks, the stock has been clobbered, even as it delivered record results for the past two quarters. This is one of those cases where the algo trading programs don’t read the fine print and lump all stocks in a sector into the same basket. Let's see how things unfold over the next couple of weeks for GRBK. Fingers crossed.

Structural Stumbling Blocks

If you’re an investor in the homebuilder stocks, as I am, you face a dual reality. The “good news”, from an investment standpoint is that homebuilders are in a good position because there aren’t enough homes in desirable locations to go around. The bad news is that asking prices and interest rates are too high.

In other words, supply is restricted, demand is stable on the favorable side, but most potential buyers can’t afford to buy because of high mortgage rates and high asking prices. Thus, the consolidative term in housing is that the current condition of the market isn’t likely to change any time soon. It’s become structural. In plain language – we’re stuck here until something changes.

The net effect is a logjam with one exit ramp – renting – until interest rates drop and prices come down. See the IYR chart below.

Real Life Analysis

Let’s compare three similar properties in a town home development I keep track of. The sub-division is in a very attractive, quiet, family oriented, yet not overhyped location and houses 25 existing luxury town homes. Most are less than five years old and are in excellent condition. There is room for another 18 units with the empty lot, on which one wonders if they will ever be built, sporting leftover bricks, brush, and a growing population of bunnies bearing witness to the market conditions. The empty lot’s saving graces are that it offers easy access to my dog’s bunny hunting proclivities, and that the creek just beyond the back end is a great place to watch wildlife; turtles, bobcats, cranes, egrets, ducks, hawks (red tails, grey hawks, black hawks, and kestrels – year round). I saw a coyote and a couple of wild turkeys saunter by a couple of years ago. In the spring, the place comes to life with other nifty species making their way back north from their migration. Canadian geese are loud, in case you didn't know.

According to Zillow listings; a four year old townhome in the neighborhood which has been on the market for a year, has an estimated monthly mortgage payment of $3321; after the price has been cut by $9000 over the last two months. A newly built (one year old), also unsold townhome in the same development has an estimated mortgage payment of $3558/month. Its asking price has been cut by $7500 over the last three months. On the other hand, a similar town home; built a year after the first one listed above, which is a rental, has been fully occupied for the past three years (three tenants with little lag in between contracts when one leaves). When I last checked, the monthly rent was $2800.

Certainly, these are not bargain properties. Yet, two things are clear. If you can afford these prices, you can get a new home for $200 more per month compared to a four year old home. Moreover, if you choose to rent, you may save $500-$700 per month.

But here’s where it gets interesting. The four year old town home gets large numbers of visitors but has yet to yield an offer. Meanwhile, every time mortgage rates drop the number of visitors to the newly built homes, just down the street increase. Yet, the net effect is the same – no offers.

The builder has told me that once they sell three of the four units that remain unsold, they can start on the next tranche. So far, all is quiet.

Bonds are in a Bullish Trend for Now

Given their effect on the activity in the housing market, it’s plausible that the current decline in rates could cause a bounce of sorts in the data over the next couple of months, especially given that spring is usually a favorable time for homebuyers. The U.S. Ten Year Note yield (TNX), the benchmark for 30-year mortgages has fallen below 4.3% and is testing the 200-day moving average.

Meanwhile, the average 30-year mortgage (Mortgage) is back below 7% and given its usual lagging relationship to TNX, we can expect the next update to deliver even lower rates.

The iShares U.S. Home Construction ETF (ITB) is having none of Green Brick’s bullishness suggesting the algos are not expecting any upturn any time soon. This may be a bullish sign. But we’ve been hurt before. Still, ITB is back near its 2023 lows, so there aren’t likely too many sellers left.

The biggest beneficiary of the lower bond yields has been the real estate market. The iShares U.S. Real Estate ETF (IYR) is moving steadily higher. I’ve been nibbling at REITs in the Sector Selector and the Smart Money Weekender. I own a small number of shares in IYR.

Bottom Line

So, the bottom line is that the bullish fundamental setup - tight supplies and favorable demand are being held back by high asking prices and interest rates. When either, or both of those metrics change, we will likely experience an improvement in the housing market. One final observation is that the bullish decline in interest rates has been completely ignored by investors in the homebuilder sector. That’s making the contrarian hairs on the back of my neck stand up.

Thanks to everyone for your ongoing support. I really appreciate it.

Thanks also to all the current Buy Me a Coffee members and supporters. Special shout out to new members who now have access to the Sector Selector ETF Service, included, at no extra charge with your Buy Me a Coffee membership. Two new trades were posted yesterday.

For active trading, short term trading strategies, check out the Smart Money Passport.

For large potential profits with longer term holding periods in stocks check out the Smart Money Passport Weekender Portfolio.

If you’re thinking about day trading, my new book – Day Trading 101

– will get you started along the right path.

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