It Could Be Worse

The pandemic is described as a crisis. Of course, it was one. Public health was ravaged. Globally, people died by the millions. The economy fell into a deep though brief recession. Many segments have yet to fully recover from the episode, including America’s office market and business travel.

At the same time, the pandemic created opportunities for industries that helped people adjust to changing circumstances. Zoom and other online platforms skyrocketed in value as business was forced to shift online.  E-commerce surged as people shopped increasingly from home, driving activity at online giants at Amazon while also helping to create a boom in warehouse and other forms of industrial space construction. Compromised supply chains induced many business leaders to shift all or parts of their supply chains to the U.S., fomenting an even larger boom in the construction of manufacturing facilities.

Such dynamics also played out in the single-family housing sector. Forced to spend more time at home during a period of rampant lockdowns and uncertainty regarding the availability and efficacy of vaccines, households naturally sought out more square footage. Freed by the ability to work from home, many chose to move to outlying suburban areas, often purchasing large homes that can also accommodate home offices, home gyms, and returning college students. Monetary and fiscal stimulus also helped. With the federal government offering stimulus payments and the Federal Reserve driving down interest rates to record lows, more people were able to supply downpayments and felt an urgency to transact.

Home values correspondingly skyrocketed, rendering homebuilders’ supply even more valuable. While it is true that homebuilder costs leapt higher due to equipment, materials (e.g., softwood lumber), worker and skills shortages, elevated sales prices often justified ongoing construction. According to data from the U.S. Census Bureau and Department of Housing and Urban Development, the median sales price of homes sold in America $327,100 during the fourth quarter of 2019, just before the pandemic undid the economy. By the fourth quarter of 2022, that figure stood at $479,500, an increase approaching 47%. While these same sources indicate that median sales prices declined in 2023, in large measure due to sharply higher mortgage rates coupled with greater affordability challenges, home sales prices remain far higher than they were at the end of 2019 when mortgage rates were meaningfully lower.

Not surprisingly, many homebuilders experienced large increases in enterprise valuations. In late-2019, Toll Brothers’ shares were trading at around $40/share. As of late-February, shares were trading north of $110. NVR and other home builders have experienced similar patterns, including surges in share prices in early-2024, perhaps because investors are speculating on sharp interest rate declines later this year, which among other things would expand affordability and likely drive sales volumes higher.

I Choose to Stay

Undoubtedly, the rise in homebuilder share valuations has caught many investors by surprise. With mortgage rates elevated, particularly by the standards of prospective Millennial and GenZ purchasers, one might have expected a different set of outcomes. After all, as of early-2024, mortgage applications, a leading indicator of home sales, were down 78% from their 2021 peak. With the population of ready-to-transact buyers having fallen so sharply, a typical investor might have expected sluggish activity and lower enterprise valuations.

What many failed to consider is that the refinancing boom that transpired in 2020 and 2021 set the stage for extraordinarily low inventories of existing homes for sale. Whether in Baltimore, MD, Kankakee, Illinois, or Tacoma, Washington, many households managed to lock into sub-4, 3, or 2% mortgage rates. They are not going anywhere (for the most part), perhaps leaving their home only when induced to reside in the heavens. According to data from Realtor.com, as of mid-2019, there were 1.24 million active listings in the U.S. At the end of last year, that number was a bit above 700,000.