The Big Housing Migration And How It Affects The Homebuilding Industry

Migration trends driven by COVID-19 are creating a new housing boom. The usually quiet homebuilders index began significantly outperforming the S&P 500 after the breadth of the pandemic became clear.

See the below chart comparing the XHB homebuilding ETF to the S&P 500:

Recent Comments From Homebuilder Executives

Listening to recent quarterly conference calls from homebuilders confirms some of the trends laid out in this article.

Conference calls are great because executives can provide more color and talk more qualitatively, allowing us to realize things purely studying financial statements wouldn’t. 

One of the largest homebuilders, Pulte Homes (PHM), had their Q4 conference call on January 29, 2021, and right off the bat, the CEO, Ryan Marshall, keys us in on some key developments going on in the industry: 

“Thanks to the sustained efforts of our dedicated team, we successfully navigated through a year that started strong, slammed to a halt and then accelerated into the strongest demand environment this industry has experienced in more than a decade. As you read in this morning’s press release, PulteGroup completed an exceptional year by delivering outstanding fourth-quarter results that included a 24% increase in orders, a 220 point increase in gross margin and a 31% increase in adjusted earnings per share. We also ended the quarter with $2.6 billion of cash and a net debt-to-capital ratio below 2%. 

Here’s Lennar Homes’ (LEN) executive chairman Stuart Miller on LEN’s Q4 call:

“We started 2020 with great expectations in an expanding market, which came to an abrupt stop with the unexpected arrival of COVID and then left back into high gear to address the market with unusually strong demand that was desperate for a home, a refuge, and a brand-new concept, the hub of everyone’s life” 

Here’s KB Homes’ (KBH) CEO Jeff Metzger on KBH’s Q4 call:

“We began 2021 with momentum, with our backlog value up over 60% year-over-year and the potential to generate as much as $6 billion in housing revenues this year as we focus on building our scale. We are poised for profitable returns-focused growth, given the composition of our backlog, a strong lineup of community openings, and our leaner, more efficient cost structure, all contributing to an expected double-digit operating margin this year.” 

Here is Green Brick Partners’ (GRBK) CEO Jim Brickman on their Q3 call. They report Q4 earnings in early March:

“The inflection that started more than a year ago accelerated this quarter. We are seeing unprecedented demand for our homes as many people adapt to a post-COVID lifestyle. People want to own their own spaces, have a home office and grill for their family and friends in their own backyard.” 

You get the point.

The industry is at an inflection point and the stock prices reflect that.

Almost all of them are above their pre-pandemic levels, and the SPDR S&P Homebuilders ETF (XHB) is at all-time-highs, trading at almost triple it’s pandemic lows.

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