For those of you who may be searching to buy a home in this crazed market, you’re experiencing a heap of bad news on top of even more putrid developments. Time and again, business news agencies report that while the acquisition spree during the new normal has been unprecedented in many respects, prospective buyers shouldn’t expect relief in the new year. On paper, that might sound like an appealing case for housing stocks.
In short, home inventory levels are well off from their pre-pandemic norms. And with demand supposedly unlikely to fade due to millennials eager to acquire their first piece of real estate, that makes for a combustible mix that entirely favors sellers. Given this ravenous demand, it appears by that logic that investors should consider housing stocks. After all, if there are that many people opening their wallets, what could go wrong?
Plenty. As in the entire bull thesis could be, well, bull.
First, before the coronavirus pandemic was even a thing, CNBC published an article in October 2019 reporting that many Americans had little to celebrate a decade after the Great Recession. More than half of Americans who were adults during the economic crisis endured some kind of negative impact and half of those say they’re doing worse now. But then, the magic coronavirus came and blessed everyone’s finances, thus also bolstering housing stocks.
But that might not be realistic which brings me to my second point: If we’re going to be blunt, one of the biggest drivers for home purchases is marriage and family building. But according to a Pew Research Center report, even well into 2020, millennials eschewed marriage and children compared to prior generations. Also, the pandemic did not cause a baby boom, which would all seem negative for housing stocks.
And by golly, when you look at the performance of housing-related public investments, they’re shockingly poor. While I’m not suggesting that a real estate crash is over the horizon, the contradiction between the bearishness in the below housing stocks and the rah-rah stories the mainstream media is feeding us seems rather odd.
To be fair, the Wall Street Journal noted that foreign investors have been moving en masse into the U.S. real-estate market, buying up single-family homes in American suburbs, which in turn should be positive for housing stocks. Still, two factors could damage this thesis moving forward: a return to the office and rising rates and the subsequent strengthening of the dollar.
Still, housing is a tricky narrative — especially in these highly volatile times. Therefore, monitor these housing stocks but don’t engage any short positions without conducting extreme due diligence:
- Lennar (NYSE:LEN)
- DR Horton (NYSE:DHI)
- KB Home (NYSE:KBH)
- Zillow (NASDAQ:Z, NASDAQ:ZG)
- Redfin (NASDAQ:RDFN)
- Opendoor Technologies (NASDAQ:OPEN)
- Matterport (NASDAQ:MTTR)
Housing Stocks to Watch: Lennar (LEN)
A home construction and real-estate company based in Florida, Lennar has made quite a name for itself building new homes in some of the nation’s most desirable neighborhoods. Given the dramatic upswing in demand for fresh inventory, you’d expect LEN to be one of the top-performing housing stocks.
Instead, it has recently become one of the worst-performing securities of any class. On a year-to-date basis, through the close of the Jan. 19 session, LEN stock is down over 13%, while in the trailing five-day period, it has lost almost 11%. In fairness, the trailing-year return is over 17%, so it’s not technically time to hit the panic button.
Still, one thing that did concern me was Lennar’s history. By the start of the second half of 2006, LEN had demonstrated a sizable drop from its prior record highs. However, the S&P/Case-Shiller U.S. National Home Price Index didn’t peak until February 2007. In other words, there’s a possibility that housing stocks could represent a leading indicator of what will happen next in the real estate market.
DR Horton (DHI)
Like other new-home-construction-related housing stocks, DR Horton enjoyed a great performance following the spring doldrums of 2020. One of the most popular home builders of high-quality units throughout the U.S., DR Horton benefitted from a fundamental catalyst: People were screaming for inventory and were willing to pay ridiculous premiums to secure their piece of the American Dream.
Over the trailing year, DHI has gained a little over 20%. But that narrative has soured very quickly in 2022, with a loss of 14% YTD. Moreover, the steepness with which the equity unit has plummeted is worrying. At first, an earlier correction took DHI to its 200-day moving average; then, the most recent gap-down loss has it trading below this critical technical threshold.
Another factor that I found bothersome was the history of DR Horton’s price chart. If you pull up the lifetime chart on Google Finance, you’ll note that DHI dipped sharply from January 2006 to July of that year. But again, the home price index didn’t peak until February 2007. And things really didn’t get apocalyptic until 2008.
While history might not repeat, it’s worth keeping this possibly leading-indicator trend of housing stocks in mind.
Housing Stocks to Watch: KB Home (KBH)
Another popular name among home-builder housing stocks, KB Home is also distinct from its peers in terms of near-term performance. While other names in the sector have generated conspicuously steep losses so far in 2022, KBH is actually up for the new year. Now, it’s nothing to write home about, which is less than 1% at the time of writing.
Still, anybody will take a modest gain than a double-digit loss — that’s a no-brainer. So, is KBH a buy?
Some folks are bullish on KB Home and to be fair, they’re not wrong to be optimistic, at least relative to other housing stocks. For instance, the company features a build-to-order approach, which “provides buyers with a wide range of choices in major aspects of their future home and a personalized customer experience through in-house community teams.” This process represents a competitive advantage and facilitates lower-cost production.
Still, I would like to remind our readers that KBH tumbled catastrophically from July 2005 to July 2006. From there, we saw a relatively modest pop higher to February 2007 (when the home price index peaked). Between then, until 2012, it was an ugly mess. Frankly, I’m in no hurry to buy this or other related housing stocks.
Zillow (Z, ZG)
I can’t be certain, but when you perform a Google search for “real estate crash” or similar phrase, the apparent majority of recent mainstream or popular articles tout the same message: while growth in prices might fade a bit, home buyers shouldn’t expect a crash, certainly not like one we saw during the 2000s decade.
After all, demand far outstrips supply, so prices will just keep going up and up. But didn’t I hear this narrative before? Oh yeah, that’s right — it was the exact same story for cryptocurrencies, where some analysts called for wild price targets by the end of 2021. While we did see a remarkable rally, we’re also in the midst of a rather painful correction.
The point isn’t to point fingers at those who made inaccurate calls. Rather, just because something seems logical doesn’t mean the market will cooperate. Just ask Zillow. It aggressively launched into its iBuyer business model of quickly flipping homes. The end result? Z is one of the worst-performing housing stocks, hemorrhaging an unsightly 63.5% over the trailing year.
Housing Stocks to Watch: Redfin (RDFN)
I don’t want to pick on Zillow, although there’s something quite satisfying about watching ZG plummet. It’s the same satisfaction I get from Toto Wolff, team principal of the Mercedes-AMG Petronas F1 Team, yelling to Formula One race director Michael Masi, “No Michael, no, no, Michael, that was so not right!”
I could listen to that all day. And I do.
If you’re a fan of schadenfreude in housing stocks, you’re in luck. Redfin, while not as notorious as Zillow, isn’t finding much to smile about. First, on a year-to-date basis, RDFN has shed a staggering 26%. Even for the laggards, that’s a conspicuously large downturn. Second, shares have tanked 63% in the trailing year, meaning that over the past five years, Redfin has only returned 32%.
While 32% isn’t necessarily anything to scoff at, at one point, it looked like shares were going to print a 5X return over the same period. To me, the latest value erosion is troubling. If the real-estate market was truly healthy and the meteoric rise sustainable, leading housing stocks like Redfin shouldn’t be absorbing this kind of pain.
Opendoor Technologies (OPEN)
Although I try to do the right thing in life whether someone’s watching or not, I’m no saint. Case in point, Opendoor Technologies. When I saw its stock’s YTD performance, I took the name of a famous Nazarene carpenter in vain. I think it was warranted though because the darn thing lost 37%.
I mean, what else was I supposed to say? You probably said it too.
But another interesting tidbit is that as of the time of this writing, OPEN stock closed at $9.99. Just a little over a week ago, I mentioned that “a very real possibility exists that shares could eventually trade below the SPAC’s IPO price of $10.” A very real possibility indeed because it happened. It’s only by a penny, sure, but it happened.
Overall, my biggest issue throughout this journey into housing stocks is that whether we’re talking about home builders, housing brokers, or iBuyers, they all stink. For Opendoor, its early stakeholders are now feeling the heat. Honestly, it shouldn’t be this way if the craze in the housing market was sustainable. By the metrics that matter, it appears it’s not.
Housing Stocks to Watch: Matterport (MTTR)
Perhaps the most worrying aspect of housing stocks is that no matter where you look, the sector seems to print ugly charts — and Matterport in this year has produced the ugliest of them all, at least on this list. Since the January opener, MTTR shares have dropped a staggering 47%. This time, though, I didn’t utter anything because Opendoor acclimated me to the horror.
As is typical for special-purpose acquisition companies post-business combination, Matterport has suffered from the dilutive impact of warrants. Still, if the real estate market were as holistically promising as the mainstream media has stated it was, MTTR should have been considered a discount buy. Indeed, my InvestorPlace colleague Will Ashworth previously stated as such.
To be fair, as Ashworth noted, Matterport’s spatial data platform — though it has incredible relevance to real estate — commands significant potential to other industries, such as retail management. Plus, Matterport isn’t beholden to just the U.S. housing market; it can easily expand abroad.
However, it seems a lot of people bought into the real estate hype and took MTTR on an unsustainable trajectory. Personally, this may be one to stay away from until we get further clarity.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.