“Build it and they will come” (Field of Dreams) is a demand-driven mantra that applies to the secular housing shortage today. The normal business world responds to shortages by rationing supply with higher prices until production can rise to meet demand. However, over the past decade the residential construction industry has been unable to increase output of new homes to satisfy an ever-rising need. Millennials have a strong desire to migrate from apartments to homes as new family formation in their 30’s requires more space. Compounding the housing supply shortage is a skilled labor shortage that makes it unlikely housing starts will reach an oversupply bubble level for many years to come. Understandably, home builders have quickly recovered from the virus lockdown and have returned to the historically optimistic pre-pandemic levels in the US. Positive sentiment leads home building, thus we expect a corresponding rebound in homebuilding soon despite COVID related economic slowdowns.

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While housing starts have not quite returned to the pre-COVID 10-year uptrend, we did see a sharp rise in May and June coincident with the gradual Government relaxation of personal activity. Home construction should remain a leader in this economic recovery.

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With the long term housing inventory shortfall, it’s logical that home prices keep rising to empirically unaffordable levels. However, mortgage rates keep falling along with borrowing costs, fueling stronger demand. Both the 15 and 30-year mortgage rates reached new record lows this week. Home remodeling and refinancing of debt are also jumping once again, making Home Depot, Lowe’s, and mortgage companies very happy.

With borrowing rates at record lows, the ability to service overall consumer debt has never been easier. Longer term virus fears and uncontrolled social unrest in larger cities mean the primary construction efforts will be in suburban and rural areas. Additionally, while residential exurbia flourishes, office construction everywhere will be curtailed as telework increases. Homebuilders, supply companies, and mortgage operations have taken off to the races outpacing the general stock market. Home Depot HD, D.R.Horton DHI, Invitation Homes INVH, and some mortgage-related outfits will continue to benefit from this trend while COVID is present and beyond. With the Fed promising to keep interest rates lower for longer and let inflation run hot, housing-related industries have a strong tailwind for investors. Once a vaccine arrives and a full economic recovery is in the rearview mirror, then we can expect some wind to come out of the sales of these stocks as well as the overall stock market.

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