Kevin, thanks for this--it's a lot for my small brain to process, so I'll try to be focused with my comments and questions. I'm hoping this time will be different than 2008-2012 when Fed policy slaughtered housing starts. Is it fair to say that current policy is acknowledging that housing will have some temporary damage but will recover after 2023?
I think that’s the right question. And it’s probably the main reason why things shouldn’t get as bad as in 2008-2012. 2 years of deep drops in new home sales in 2006-2007 were obviously a recessionary signal, but the zeitgeist so passionately embraced the “bubble oversupply” narrative that the Fed ignored most basic and obvious signals and kept targeting collapse. This time the undersupply problem is more understood so I don’t expect there to be a groundswell of support for continuing collapse if new home sales a year from now are half of what they are now.
It always comes down to valuations. I haven't looked closely enough at any REITs to know how to think about the valuations.
But, homebuilders, definitely. They are way too cheap, and I would say the more leveraged the better. A year ago, I'd say you had to be a bit of a stockpicker. But, today, the whole sector looks undervalued to me.
Thanks for the quick response. Have you followed Ivy Zelman's work? She seems to be taking the opposite side of your argument...she believes we have too much housing for the coming demographic trends.
Yes. You should thank her for motivating willing counterparties for your trades.
Again, I haven't looked closely at REIT valuations, but conceptually this is one reason I think the homebuilders have an interesting position here. Zelman seems to argue that supply coming online is going to tank rents and that developers are counting on rising rents to justify investment. I don't necessarily disagree with here point, except that (1) I think we are much farther from a supply surplus than she does, and (2) declining rents would be normalization and it will happen if we get out of its way, even if the process isn't great for the ROI of every developer. But, for it to happen, we'll need to build a lot. Developers and property managers have various sensitivities to those various outcomes, but homebuilders look good either way - either because home values hold or because we build enough to bring rents down.
Kevin, thanks for this--it's a lot for my small brain to process, so I'll try to be focused with my comments and questions. I'm hoping this time will be different than 2008-2012 when Fed policy slaughtered housing starts. Is it fair to say that current policy is acknowledging that housing will have some temporary damage but will recover after 2023?
I think that’s the right question. And it’s probably the main reason why things shouldn’t get as bad as in 2008-2012. 2 years of deep drops in new home sales in 2006-2007 were obviously a recessionary signal, but the zeitgeist so passionately embraced the “bubble oversupply” narrative that the Fed ignored most basic and obvious signals and kept targeting collapse. This time the undersupply problem is more understood so I don’t expect there to be a groundswell of support for continuing collapse if new home sales a year from now are half of what they are now.
So are you long home builders and housing REIT's?
It always comes down to valuations. I haven't looked closely enough at any REITs to know how to think about the valuations.
But, homebuilders, definitely. They are way too cheap, and I would say the more leveraged the better. A year ago, I'd say you had to be a bit of a stockpicker. But, today, the whole sector looks undervalued to me.
Thanks for the quick response. Have you followed Ivy Zelman's work? She seems to be taking the opposite side of your argument...she believes we have too much housing for the coming demographic trends.
Yes. You should thank her for motivating willing counterparties for your trades.
Again, I haven't looked closely at REIT valuations, but conceptually this is one reason I think the homebuilders have an interesting position here. Zelman seems to argue that supply coming online is going to tank rents and that developers are counting on rising rents to justify investment. I don't necessarily disagree with here point, except that (1) I think we are much farther from a supply surplus than she does, and (2) declining rents would be normalization and it will happen if we get out of its way, even if the process isn't great for the ROI of every developer. But, for it to happen, we'll need to build a lot. Developers and property managers have various sensitivities to those various outcomes, but homebuilders look good either way - either because home values hold or because we build enough to bring rents down.