Real Estate Stocks, Housing Markets To Watch In Surprise Covid Boom – Investor's Business Daily

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Just six months ago, the idea of a housing boom would have seemed ridiculous as millions of Americans were losing their jobs. But low interest rates and the work-from-home trend are stoking real estate stocks and home sales in smaller housing markets.


The flip side is that once-sky-high markets have come crashing down, especially in the San Francisco Bay Area. But overall, both new and existing-home sales have reached levels last seen before the Great Recession.

Real estate stocks are rebounding strongly. The triple-leveraged Direxion Daily Homebuilders & Suppliers (NAIL) ETF has shot up 900% from its coronavirus crash lows. Homebuilders like LGI Homes (LGIH) and D.R. Horton (DHI) have broken out into buy zones.

Low mortgage rates spurred longtime fence-sitters to jump into the market, Chief Economist Danielle Hale says. But she acknowledges the housing boom is uneven.

“Among a lot of key homebuyer demographics, high-income folks, we haven’t seen the same level of job losses that we have among lower-income workers,” she told IBD. “So that has helped the market from a homebuyer perspective.”

Demographics are a factor too as more millennials — the nation’s largest adult generation — are starting families and driving demand for single-family homes. And the leading edge of Generation Z, an even larger cohort that straddles young adults and adolescents, is just starting to buy homes.

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Best Housing Markets

As living within commuting distance to work becomes less important, the housing boom is elevating some surprising markets.

According to data for September, the hottest metro areas include Fresno, Calif.; Columbus, Ohio; Rochester, N.Y.; Colorado Springs, Colo.; Bakersfield, Calif.; Portland-South Portland, Maine; Worcester, Mass.; Stockton-Lodi, Calif.; Harrisburg-Carlisle, Pa.; and Allentown-Bethlehem, Pa.

Under this definition, “hotness” reflects a combination of factors like how quickly properties sell and the number of views per property.

In January, before the coronavirus forced millions to work from home, the San Francisco-Oakland area was the hottest metro market. Fresno was No. 9.

Bakersfield was No. 10. It moved up to No. 5 last month even as the collapse in oil prices slowed its energy sector. But the biggest gainers include Allentown, Pa. (No. 65 in January), Portland, Maine (56), and Harrisburg, Pa. (54).

Outside the top 10, others have made big leaps too, such as the Riverside-San Bernardino-Ontario, Calif., area about two hours’ drive from Los Angeles. Before the pandemic, it was already growing as a major distribution hub for Amazon and other e-commerce companies. It’s now the No. 39 market, up from No. 68 in January.

Regional differences could also determine which real estate stocks outperform. Of the 30 hottest housing markets, 20 are in the West and Northeast.

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Worst Housing Markets

The San Francisco-Oakland area plunged to No. 45 in September as Bay Area tech giants like Facebook (FB) and Twitter (TWTR) allowed employees to work from home indefinitely.

The San Jose-Sunnyvale-Santa Clara area — in the heart of Silicon Valley — plunged to No. 62 in September from No. 3 at the start of the year.

Housing markets outside high-cost, high-tax California felt the pain too. The Dallas-Fort Worth metro area, which has been drawing businesses and residents from California, saw its rank tumble to No. 41 from No. 19 in January.

The crash in oil prices may also be slowing the Dallas housing market. Many companies that serve the Permian Basin farther west have headquarters there.

At the very bottom, the coldest large metro areas last month included Miami-Fort Lauderdale-West Palm Beach, Fla.; Baton Rouge, La.; Honolulu, Hawaii; McAllen-Edinburg-Mission, Texas; Cape Coral-Fort Myers, Fla.; and New York, N.Y.-Newark-Jersey City, N.J. Most of those markets were already near the bottom in January.

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Wanna Get Away?

For tech workers choosing between San Francisco and Fresno, here’s what they can expect.

The lowest-priced condominium for sale in San Francisco costs about $240,000. That buys a one-bedroom, one-bathroom unit covering 506 square feet. That’s about the size of a suite in a four-star hotel. It’s far more common for desirable condos in San Francisco to top $1 million.

For about $270,000, it’s possible to purchase a new five-bedroom, two-bathroom home in Fresno covering 1,718 square feet. And that home could sit on a plot of land topping 10,000 square feet. To attend the occasional meeting in San Francisco, would take three hours to drive or an hour via air.

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Work-From-Home Surge Lifts Real Estate Stocks

As more Americans move to smaller cities like Fresno and Rochester, homebuilders may be the real estate stocks with the edge.

The work-from-home trend will ease post-Covid but still have a lasting impact, analysts say, influencing the sort of homes people buy as well as their locations.

“For people who are wanting to move a little further out than the normal suburban core, manufactured housing, as well as stick builders, is going to be there to meet that need,” Wedbush Securities analyst Jay McCanless said.

He believes the flexibility possible when building a new home can give homebuilders an advantage when competing against existing homes.

Customer demand is already causing builders to adapt by offering homes tailored to their needs, including videoconferencing via Zoom Video (ZOOM).

“Some of the builders have told me they have had customers say they like house plan A, but ‘Is there a way you can add a Zoom room or a video room where I can do calls back and forth with the office?’ ” McCanless said.

“Builders are starting to modify plans when they receive requests like that. These are easy things to do with a new construction that are possible but harder to do with an existing home.”

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Top Real Estate Stocks

The National Association of Home Builders/Wells Fargo Housing Market Index hit a new high of 83 in September. That marked a massive turnaround after an unprecedented dive of 42 points in April to just 35. Readings above 50 indicate growth, while those below 50 indicate contraction.

One of the best-performing real estate stocks is D.R. Horton, the largest homebuilder by volume in the U.S. It is up more than 45% this year, and ranks near the top of the IBD 50 list of the best growth stocks.

During the D.R. Horton Q3 earnings call in July, COO Michael Murray said the company is ramping up production to meet demand.

“Due to a significant increase in sales in May and June, the portion of our backlog that is not yet under construction is higher than normal and our number of completed unsold homes is lower than in recent years,” he said.

Even better for real estate stocks is the fact they have room to raise prices due to the high demand. This improves both profits and the ability of firms to meet rising costs.

Eric Lipar, CEO of Leaderboard stock LGI Homes, underlined this point during the firm’s earnings call last month. “We’re all seeing increased demand and sales are going extremely well,” he said. “So I think we’re all raising prices.”

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Best Homebuilder Stocks 2020

Alongside D.R. Horton and LGI Homes, the other best-performing real estate stocks of 2020 as ranked by IBD are Meritage Homes (MTH), MI Homes (MHO) and Century Communities (CCS). All have a Composite Rating in the high 90s, which indicates broad strength in important fundamental and technical areas.

Company Ticker Comp Rating % Chg YTD % Chg From 2020 Lows
Meritage Homes MTH 99 82.0 340.7
LGI Homes LGIH 96 77.8 280.8
MI Homes MHO 99 16.4 376.2
Century Communities CCS 98 64.9 398.8
D.R. Horton DHI 98 46.3 202.2

Another hot real estate stock is luxury homebuilder Toll Brothers (TOL), which saw signed contracts soar 76% in June and jump 31% in July.

In fact, July contracts were the highest in its history, even topping the typical spring selling months of February, March and April.

Strong demand continued through the summer, with August deposits trending even better than July’s, CEO Douglas Yearley said at the end of August.

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What The Future Holds For Real Estate Stocks

Despite millions still unemployed for the foreseeable future, analysts believe real estate stocks should thrive going forward.

In fact, a defining feature of the latest boom may be how much it’s driven by high-income Americans, whereas the last one was broader.

Yearley said a key reason behind Toll Brothers’ current success is the resilience of its target demographic: college-educated professionals.

They are working from home much more, and that will likely continue long-term, he said. Yearley also noted the unemployment rate for college graduates is lower than that of the population in general.

“This gives them confidence to buy a new home,” he said. “In addition, they are more likely to have accumulated wealth from the strong stock market.”


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