Homebuilders Deliver Strong Second Quarter

• Amid the volatile backdrop of trade wars and geopolitical uncertainty, the US housing market may be an unlikely stabilizing force. As goes the housing sector, so goes the economy.
• 2019 continues to be a year of rejuvenation for the single-family homebuilders after falling into a “mini-recession” in 2018. Sharply lower mortgage rates have eased affordability concerns.
• Second-quarter earnings season may go down as the turning point for the largest US homebuilders. Order growth exceeded expectations, rising more than 6% from last year.
• While slower-reacting data sets remain soft, forward-looking metrics like mortgage demand, homebuilder sentiment, and commentary from homebuilders have painted a brighter picture for the second half of 2019.
• Long-term fundamentals continue to support healthy and growing demand for single-family homes in the 2020s and upward pressure on home values amid a growing housing shortage.

Signs of Strength for Homebuilders

Second-quarter earnings season may go down as the turning point for homebuilders following perhaps the worst quarter for the sector since the financial crisis in 1Q19. The most closely-watched metric, order growth, significantly exceeded expectations, rising more than 6% from last year, suggesting that lower mortgage rates are indeed translating into improved demand. The strength was most pronounced, interestingly, in the smaller homebuilders as Taylor Morrison, MDC, and Meritage each reported order growth of more than 20%. Homebuilding revenues, meanwhile, grew 4% while deliveries rose 5%. Commentary on earnings calls was decidedly positive with most builders noting momentum continuing in the weeks since quarter-end.

The winds have shifted rather dramatically over the last seven months as many of the headwinds faced by the homebuilding sector have become favorable tailwinds. A central theme that we continue to discuss is the lingering underinvestment in new home construction during the post-recession period and the ripple-effects it has on all segments of the US housing industry. By nearly every metric, single-family housing markets remain significantly undersupplied. With the exception of the three "bubble" years from 2003-2006, the United States has been under-building homes since the early 1990s, and that trend of underbuilding has intensified dramatically since the housing bubble burst in 2008. A shortage primarily rooted in sub-optimal public policy at the local, regional, and national levels, the US is building homes at a rate that is less than 50% of the post-1960 average after adjusting for population growth.

Already the largest spending category for the average American, we see housing costs and rents continuing to rise as a share of total spending as a result of the growing housing shortage. At the investment level, we continue to see a long runway for growth in new residential housing construction - most of which will take place in the single-family sector over the next decade - in order to equalize the supply/demand imbalance. Until this imbalance is equalized, however, we expect continued upward pressure on housing costs and broader housing inflation, which already has been one of the lone drivers of inflation over the past decade.

For an in-depth analysis of all real estate sectors, be sure to check out all of our quarterly reports: Homebuilders, Apartments, Student Housing, Single Family Rentals, Manufactured Housing, Cell Towers, Healthcare, Industrial, Data Center, Malls, Net Lease, Apartments, Shopping Centers, Hotels, Office, Storage, Timber, and Real Estate Crowdfunding.

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