Sometimes, there can be too much of a good thing. Since the start of the Covid-19 pandemic an already strong housing market has become super-charged, as unprecedented demand pushes home prices through the roof (pun intended). The Case-Shiller National Home Price Index has gained an astonishing 30% YoY, as shown below (click to enlarge). Makes the HPA of the 2000s look almost mild by comparison!
This should be a great situation for homebuilders, no? Umm...not really. Here's a chart of the SPDR S&P Homebuilders ETF, which tracks a broad-based, equal-weighted index of US companies involved in the homebuilding industry. It's down nearly 30% after peaking in early December. What gives? Bloomberg's Odd Lots Podcast, hosted by Joe Weisenthal and Tracy Alloway, has a good explanation. While Housing Starts have been growing with housing demand, Housing Completions, have been going sideways recently. A scarcity of materials and labor means those homes don't actually get built. There's now a clear and growing gap between these two series as shown below:
The upshot is investors are worried that with interest rates (and, with it, mortgage rates) rising, housing demand may cool by the time all these homes are finally completed, and homebuilders might have to take write-down on the assets. So much so, that KB Home, a leading homebuilder in the U.S., is actually trading below its book value!
An overreaction? Possibly. Given that the U.S. has a shortage of 4-5 million housing units which will only grow as 10 million new households are formed in the next 10 years, it seems like most of these homes will get snapped up, if not by individual households, then investors who buy to rent out. Single-family rentals are a big business. So, a good time to buy KH Home (NYSE: KBH)?
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