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Well folks, happy Friday evening, after a wild week throughout equity markets and the geopolitical realm, we’ve finally made it to the weekend. Keep reading, for a long-term piece regarding our updated thoughts on the American housing market, and an opportunity to capitalize on them.

“The strength of the team is each individual member. The strength of each member is the team.”
— Phil Jackson


Return to Normal Set to Cause Turmoil in the American Housing Market
Although we’ve previously written about the current and ongoing troubles plaguing the North American housing market, here and here, after recent data has been reported, we thought it appropriate to publish another piece on the matter. Although we don’t aim to sound like a broken record, new reports have proven that the situation is substantially worse than we thought across the broad majority of the United States. That’s not to say that we are approaching 2008 levels of destruction, however, we must remember what has occurred to prices, and demand during the frenzy of the past two years. Even if the market simply corrects to pre-pandemic levels, barring all other recessionary factors for a moment, the majority of buyers throughout these past two years will be left seriously disaffected from the declines in prices and competition. First and foremost we’ll start by going through an overview of the nationwide competition in the general market. One of the best indicators of market sentiment is the competition index. The below displays the percentage of houses that faced at least one competitive bid from April 2020 to June 2022.
This marks the lowest competitive environment that the US market has seen in roughly two years. To put that in perspective, take a look at the figures below from July 2019.
To add some context, this 11.2% figure marked the lowest amount of competition since 2011, however, we were in an entirely economic situation then at that time. Even as the June 2022 level of competition represents a reversion to the mean, house prices have jumped exponentially throughout this time.
As noted above by the St. Louis FED, the average US house price has jumped 35.6% from Q1 2020 to Q1 2022, moreover from Q1 2010 this represents an 84.5% increase. One must ask themselves, have wages climbed anywhere close to 84.5% in the last 12 years, or over a third in the past two years? Has the cost of living declined remotely? Especially in the time of rising interest rates that are making it harder for buyers to qualify for, and purchase homes, how can the market expect demand to rebound with these current conditions? To clarify, as the chart below displays, June home inventory is sitting at roughly two thirds of pre pandemic levels. However, like the equities market, sentiment is radically altered.
The pre pandemic market was filled with those who had bought equities, or rather indices, and were making money on them, meaning they had little incentive to sell. However, as the recent drawdown in equities has shown, many are willing to part with their investments in an attempt to lock in profits. While the goods sold are different, market psychology remains very similar across the board. As such, we should expect little to no difference from the participants of the housing market. Forget those who are incentivized to sell for a moment, as of mid June we’re seeing large increases in those who have cancelled agreements of homes they’ve already agreed to purchase. This number climbed to 15% nationwide, representing a 36% increase from 2021. At the end of the day, whether they’d like to admit it or not, the actions of home buyers are predicting a downtrend within the near future. In tandem with the decline of home sales, the rise in interest rates have created another issue, a slump in the refinancing and mortgage industries. Throughout the pandemic these industries were booming as rates were slashed to all time lows, meaning many had the incentive to search for better deals. However, now that these rates have climbed, this demand has slowed dramatically. As such, we recommend a long term short on Rocket Companies Inc ($RKT-NYSE), as their portfolio of companies contains many lines of business that will be affected by the current drawdown. Those LOB’s being mortgage lending, refinancing, and their digital point of sale mortgage platform.
Chart of the Day – Manufacturing orders throughout past recessions