U.S. housing market about to get SLAMMED

[Read the Footnotes]

^ I think the bullish take for suburban houses that their appreciation For 10-15 years has lagged so far below core city areas now that they have become a great value in some areas. It’s highly attractive for some millennials who probably get into the age of having kids where the better suburban schools and more space make this option more attractive.

 

Then we have a trend towards remote working and the pandemic which generally was far worse to experience  in cities as additional factors lately.

In the US at least, think if anything the pandemic is likely to reverse the trend toward more people living downtown in smaller spaces as was the trend over the last decade.

 

I imagine it was especially unpleasant to have moved downtown from a large suburban home in order to spend your retired years enjoy the pleasures of an urban renaissance with it's walk-able streets and crowded cafes. I am not saying urban life will be dead, but the relative valuation gap probably just got reduced significantly if only in the short run. And some specific development styles such as the ones with very little personal space in favor of more common spaces, may not be desirable at all for some time and may ultimately be renovated.

 

I have been amazed at the young people who loved city life who face very little health risk from COVID-19 who don't want to return to the cities after this over.

[nickenumbers]

Guys,

 

I wanted to get your opinions on US national home builders.  [Lennar, DR Horton, Pulte, KB Homes].

 

Over the years, I have tracked the them due to the narrative that we are all familiar with, post 2008 under supply, millennial growing household formation, etc..

 

I own Lennar specifically.  And, it has had a run up to close to IV post Covid-19.  Low interest rates and people moving out of the city.  Entry level new houses and move-up houses.

 

But, with government stimulus and with continued unemployment, I am starting to wonder if I should cut and run. 

 

Home owners need jobs and income to buy houses and to continue to pay for mortgage.  The government is ultra incentivized to keep the party going, I know.

 

I frame it to myself with a question.  "Was owning the US National Home builders a better position in 11/2019, or in 7/2020?"

 

Any input is appreciated.

[TwoCitiesCapital]

 

Home owners need jobs and income to buy houses and to continue to pay for mortgage. The government is ultra incentivized to keep the party going, I know.

 

I thought the same about iPhone sales, but in environment where ~20 million people are collecting unemployment and the government is debating how to keep them in their homes, Apple had a record quarter.

 

 

If this is what people are spending the stimulus on, and the government keeps the stimulus going, then we should all probably remain bullish as dumb as it seems compared to fundamentals.

 

The time to be concerned will be if the government passes a reduction in stimulus spending that goes straight to consumers (like the Republicans are currently proposing).

[rkbabang]

What I see in my area is that housing prices are increasing and properties are going under contract the day they go on the market.  I think people are fleeing the cities and looking for suburban houses.  I think the cities are in trouble.

[Gregmal]

More generally, I think it is a mistake(mentally) how everyone always assumes, everything needs to "plummet", "get slammed", "crash", etc. There are so many of variable outcomes in between the goal posts of the situations entirety, thats ridding yourself of that knee jerk panic reaction is usually helpful.

 

What Ive seen in the markets I follow(blue, high tax, NJ/NY) is the same as has been occurring for awhile. Insatiable demand for sub $500k SF, above that price point it gets a little trickier, although there has been a bit of uptick in demand there as well.

[Jurgis]

What I see in my area is that housing prices are increasing and properties are going under contract the day they go on the market.  I think people are fleeing the cities and looking for suburban houses.  I think the cities are in trouble.

 

But are city demand and prices actually dropping?

[BG2008]

More generally, I think it is a mistake(mentally) how everyone always assumes, everything needs to "plummet", "get slammed", "crash", etc. There are so many of variable outcomes in between the goal posts of the situations entirety, thats ridding yourself of that knee jerk panic reaction is usually helpful.

 

What Ive seen in the markets I follow(blue, high tax, NJ/NY) is the same as has been occurring for awhile. Insatiable demand for sub $500k SF, above that price point it gets a little trickier, although there has been a bit of uptick in demand there as well.

 

Yeah, every time we have a crisis, everyone says  "plummet" "spirals out of control" "slammed".  In the Queens residential rental market.  We got down to about 50% rent collection in April from the chatters that I had with people.  Many of the tenants are restaurant employees.  But by July, they are getting close to 80-100% rent collection.  Obviously, smaller # of units equals big fluctuations.  But if you talk to enough people, the overall numbers tend to be meaningful.  The things that worries me is the crime.  Simply put, if a cute 22 year college grad is afraid to move to NYC because she feels (doesn't matter if it's true or not) unsafe, then we have a problem.  The key is the perception not the actual stats.  If that cute 22 year old don't want to move to NYC, then the companies have no reason to set up shop there.  That's a real spiral.  This is why I worry about DeBlasio.

 

The only time that I have really seen the US Housing Market get SLAMMED was during 08/09.  It really got slammed.  Simply put, people could not afford the mortgage.  It was ludicrous.  If you have 20-30% equity in your RE and you can service the debt, you will do everything you can to hold onto it and keep chugging on.  In RE, the transactions happen because either you can no longer pay your mortgage or your bank force you to sell.  No one sells RE in the private market by saying "hmm, this looks a little rich, let me sell and re-deploy into some other liquid asset class.  I don't mind paying cap gains and depreciation recapture as well."  Depreciation Recapture is a bitch. 

 

As I have gotten older, I have come to appreciate how much inertia there is once you have kids and wife.  Man, I don't make the most rational decision anymore on a purely financial basis.  Rule number one, keep the Mrs happy.  Rule number two, listen to the Mrs.  Rule number three, pay attention to the future needs of your kids.  Rule number four, don't forget these 3 rules and verbally communicate to the Mrs. that those are your top priorities.  Rule number five, now you can think about what you want. 

[Gregmal]

More generally, I think it is a mistake(mentally) how everyone always assumes, everything needs to "plummet", "get slammed", "crash", etc. There are so many of variable outcomes in between the goal posts of the situations entirety, thats ridding yourself of that knee jerk panic reaction is usually helpful.

 

What Ive seen in the markets I follow(blue, high tax, NJ/NY) is the same as has been occurring for awhile. Insatiable demand for sub $500k SF, above that price point it gets a little trickier, although there has been a bit of uptick in demand there as well.

 

Yeah, every time we have a crisis, everyone says  "plummet" "spirals out of control" "slammed".  In the Queens residential rental market.  We got down to about 50% rent collection in April from the chatters that I had with people.  Many of the tenants are restaurant employees.  But by July, they are getting close to 80-100% rent collection.  Obviously, smaller # of units equals big fluctuations.  But if you talk to enough people, the overall numbers tend to be meaningful.  The things that worries me is the crime.  Simply put, if a cute 22 year college grad is afraid to move to NYC because she feels (doesn't matter if it's true or not) unsafe, then we have a problem.  The key is the perception not the actual stats.  If that cute 22 year old don't want to move to NYC, then the companies have no reason to set up shop there.  That's a real spiral.  This is why I worry about DeBlasio.

 

The only time that I have really seen the US Housing Market get SLAMMED was during 08/09.  It really got slammed.  Simply put, people could not afford the mortgage.  It was ludicrous.  If you have 20-30% equity in your RE and you can service the debt, you will do everything you can to hold onto it and keep chugging on.  In RE, the transactions happen because either you can no longer pay your mortgage or your bank force you to sell.  No one sells RE in the private market by saying "hmm, this looks a little rich, let me sell and re-deploy into some other liquid asset class.  I don't mind paying cap gains and depreciation recapture as well."  Depreciation Recapture is a bitch. 

 

As I have gotten older, I have come to appreciate how much inertia there is once you have kids and wife.  Man, I don't make the most rational decision anymore on a purely financial basis.  Rule number one, keep the Mrs happy.  Rule number two, listen to the Mrs.  Rule number three, pay attention to the future needs of your kids.  Rule number four, don't forget these 3 rules and verbally communicate to the Mrs. that those are your top priorities.  Rule number five, now you can think about what you want.

 

Branching off your point about crime, I have a life long friend who was always a bit of a suburb/country guy. Carpenter by trade. Vowed his ambition was to buy a decent plot with a small house and a huge garage with a loft in a rural part of NJ/PA. Then he met his wife, who was a typical suburb girl. Needed to go get the "live in NYC/Hoboken" right of passage out of her system, and he got dragged along. Both worked in NYC so at least it was convenient. They have a 1 year old as well. Turns out that the BBQ shooting that killed the infant in Brooklyn was on their street. They went to their landlord the following week, negotiated a breaking of their lease, and are moving back to the burbs. I share your concerns about the effect of crime, although I have for awhile, well before this outbreak.

 

On the leasing/collections side, at least in terms of CRE, I've gotten significantly more comfortable lately as the results have rolled in and figures solidified a bit. The doomsday situation IMO was current leases being broken and huge numbers of insolvencies or properties flooding the market. This is clearly not happening. As long as we continue to see CRE tenants paying their rent, the best players, with strong balance sheets and good properties, will be quite OK.