A curious thing just happened on Wall St. – an anomaly really. Homebuilders (companies listed on Wall St. that build and sell new homes) have been on a big winning streak this year, up approximately 25% since the beginning of 2019.
But that’s not the anomaly, what’s interesting is that these company’s growth is actually accelerating.
Recently the Dow Jones U.S. Select Homebuilders Index (an index that tracks the biggest and best homebuilders in America) rallied for seven days in a row, which history tells us is an incredibly bullish sign not only for homebuilders but also for real estate as a whole.
Wall St. knows something you may not – housing is in demand and there is not enough supply to go around.
Looking back over the last 50 years, you can see that U.S. home completions have generally ranged between one and two million new homes built per year. But look how low the new home completions have been over the last decade, the creation of new homes has been drastically lower than historical averages.
Think about this for a moment – what if car companies cut the number of new cars being produced in half for 10 years? What do you think would happen to new car prices? Well if there was sufficient demand for new cars, you would expect prices to rise until supply met demand.
Wall St. knows this and is buying homebuilders not only because supply has been constricted, but demand is also likely to accelerate as we enter the summer buying season.
The strong job market, higher incomes, and lower interest rates all add to the overall demand for housing – and right now we have a perfect storm for housing demand.
The unemployment rate is down to 3.6% and average weekly earnings are up 2.9%. With more jobs and more earnings, potential buyers are more confident and have more disposable income to buy versus rent.
But that’s not all. Simultaneously interest rates are going down, making housing more affordable, in many instances more affordable than rent.
Checking in on the Housing Affordability Index and looking back nearly thirty years, we see housing is still very affordable for most American today. The higher the number the more affordable housing is.
Any reading over 140 is considered very affordable housing and the only time housing was more affordable was during the great recession when interest rates were at all time lows and housing prices were deeply depressed.
What about the overall supply of existing homes – we already know new home construction is down, but what about exiting home supply?
Existing home supply remains near historical lows as well. Supply is running low for both new and existing homes, while demand due to increase job creation and wages is pushing demand higher.
Wall St. understands supply vs. demand and they are investing in homebuilders because they believe homebuilders will have plenty of business and profits ahead of them.
The same dynamics are at play for you as a homeowner or potential homebuyer. Supply and demand dynamics point to higher prices and increased competition for housing. When buyers compete – prices go up.
The information that Wall St. is acting on is contrary to what you might hear on the news. The constant half-truths in the media can be confusing. We wrote an article about how the media is incorrectly spinning the housing market in our view – you can check it out here: Real Estate Has Entered A Mental Recession
Don’t allow the doom and gloom from the media frighten you – the housing market is strong and should continue to grow throughout 2019.
Reach out to us if you have questions on these numbers or how to best strategize to take advantage of the continued growth in the housing market.
