Home Building – Safe as a House !

The outstanding “home run” of the major US builders, D.R. Horton , Lennar , PulteGroup , NVR and Toll Brothers is mirrored by the providers of building materials, specialized furnishings and services, the diversified selection of industries of this theme

In residential housing, medium-term projections rest on the predictable ground of demographics and the buying power of the “Millennials” born in the 80’s, entering their thirties and turning 40 this decade, will weigh on the market for years to come

Millennials are 43 million in America which is two million more than the age group born in the 1970’s (41 million) and housing demand will not ease with the next cohort born in the 1990’s (44 million)

It is true rising mortgage rates have been impacting housing sales marginally in 2022-2023 but their impact on house prices is skewed by a range of factors

• In a market of higher mortgages, current homeowners will tend to hold on to their existing lower mortgage contracts, approx. two-thirds of which are below 4% (and 92% are below 6%) - putting a damper on the house stock available for sale
• Institutional investors, which have been very active in the acquisition of homes for rentals, are much less engaged due to the higher interest rates
• Individual buyers working from home appear willing to commit a large share of income to their home, above the 30% standard affordability fair value of their revenue

In summary,

• new home sales are likely to remain strong, even in the face of high mortgage rates (around 7%), simply because the limited availability and low inventory
• rates might have to raise higher – and certainly for longer than anticipated even as the US Fed continues quantitative tightening – to cool down the residential real estate markets – red-hot in 2022 in states such as Florida (+57% over one year)

While a recession is anticipated by many observers in the Fall of 2023, the housing shortfall, estimated at more than 1.5 million homes per year (over the next 10 years), the demographics, the limited stock of houses on the market and the willingness of buyers, impervious to the high mortgage rates, to pay over the top will all continue to boost the construction business

Our theme, made up of leading construction equipment and services, may turn out to be the canary in the coal mine, if and when the recession unfolds…but not yet