As stocks tumbled this past week, mortgage rates quietly shrank to near record lows, which means that conditions are perfect for house buyers, except for some nitpicks. Almost no one is selling. Prices are high. Open houses don’t pair well with pandemics. And banks are reluctant to lend—but only to people who need money.
Despite these hitches, transactions are getting done. The Mortgage Bankers Association Purchase Index for the week ending on June 5 was up 13% from the same week a year ago. Taylor Morrison Home (ticker: TMHC), the No. 5 U.S. home builder, whose sales declined 30% in April versus a year earlier, reported a 17% increase in May. “We’ve seen that momentum continue,” CEO Sheryl Palmer says. “How we can go from peak to trough back to peak again, all in about 10, 12 weeks, is unlike anything I’ve seen.”
Last week in this space, I touched on my chat with Yale University economist Robert Shiller, who predicted that house prices in the suburbs would rise faster than those in city centers in coming years, as buyers, now practiced at working from home, seek more social-distancing space. It could be months before house-price indexes offer proof. This past week, I reached out to Glenn Kelman, CEO of Redfin (RDFN), for a real-time read.
Redfin, which went public three years ago, hopes to gather market share in the highly fragmented real estate brokerage industry through low fees and technology savvy—virtual tours, advanced data analytics to recommend homes to buyers, direct online purchasing, and so on. Its shares are up more than 50% year to date, suggesting that investors view the company as a relative winner under current conditions.
Kelman says traffic growth for his online listings for houses in suburbs and small towns has outpaced that for in big cities by 164% over the past two months. That backs up agents’ anecdotal evidence that buyers are moving from cities out to the country, he says.
Meanwhile, April inventory of existing homes for sale was the lowest on record for the month, according to the National Association of Realtors. And bank forbearance has reduced foreclosures, further restricting supply. That means that despite weak economic conditions, small-town homeowners who happen to be interested in selling may be able to name their prices.
“We’re set up this summer for the mother of all bidding-war seasons, at least in these outlying areas,” Kelman says. “There’s nothing to sell, and there are so many people who want to buy. They’re emboldened by the stock market and the low rates.”
For homeowners looking to sell, Kelman says that tastes have changed during the pandemic. Whereas buyers wanted open floor plans before, now they want his and her Zoom rooms for videoconference meetings. Before selling, don’t make any upgrades that don’t add square footage, unless it’s the kitchen. Other tips have stayed the same. Paint using neutral colors, and make sure the front yard is spiffy for all-important first impressions.
For investors eyeing Redfin stock, Barron’s Roundtable member Henry Ellenbogen, a longtime investor, says that the company’s technology allows its agents to sell three times as many houses as those at competing brokers, and that Redfin has less than 1% market share but is growing much faster than the industry.
One constraint to growth is that Redfin’s agents are employees with benefits, not commission-only independent contractors. That means it had to furlough workers during the recent downturn and then bring them back, temporarily limiting its ability to take market share. Also, Redfin isn’t expected to begin generating meaningful free cash until 2024. Revenue by then is expected to multiply more than four times, to $3.6 billion.
Kelman, 48, says he plans to hold growth to 20% to 30% a year to keep careful control over agent quality, but his long-term vision for the company isn’t as restrained.
“We’re going to be growing every year for the rest of my life,” he says. “Our goal is to build a $50 billion, $100 billion company.” Today’s market value is just over $3 billion.
Tight housing supply and low interest rates should provide support for home builders, so long as the economy continues to recover. If Taylor Morrison isn’t as familiar as other industry players, it’s because it’s the product of recent deal making. Formerly the North American division of two United Kingdom home builders that merged in 2007, it went public in 2013 and has since snapped up a string of U.S. builders, giving it exposure to sunny states stretching from California to Florida. Its latest purchase, William Lyon Homes, closed in February.
CEO Palmer says she doesn’t see as much evidence of buyers fleeing cities, perhaps because Taylor Morrison doesn’t have much exposure to markets hardest-hit by the pandemic, like New York. In recent customer surveys, the top two reasons for buying are the desire for better technology, and for more rooms.
“What it really means is, ‘What I have to do working from home has just changed, and I can’t retro my house,’ ” she says.
Palmer says she has seen solid interest from millennials, which might bode well for long-term demand.
“I think the sound bite sounded really good for the past few years, that millennials prefer the urban kind of core, and they’re not homeowners,” she says. “Our research doesn’t show that at all. In fact, about a third of our buyers are millennials, and nearly 50% of those buyers are buying their second home already.”
Taylor Morrison shares trade at 12.6 times estimates for this year’s depressed earnings, or 6.5 times early estimates for next year.
Much as I’d like to trade up to a bigger house, I suppose I should wait for better supply. For now, I plan to convert my Zoom room to a chapel and just pray that the kids go back to school in the fall.
Published by Barron’s