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Homebuilding Stocks: Rising With Reason

The Fed will "try" to hold down interest rates as long as possible, but the November elections and continued inflation will ultimately win the day. The ascent of interest rates is guaranteed. As interest rates rise, so do monthly mortgage payments on new "fixed" loans. With continued inflation, less household budget is also left each month for mortgage payments unless wages rise faster than inflation.

We must eat, drive to work/school, insure ourselves to a degree, heat/power our homes, buy some clothes made in China, etc. but we don't need to take on a new mortgage payment. We can stay where we are or rent if we must move to another location.

To add fuel to the Santa Anna fires in Southern California, there are few new home developments without very stiff mello roos tax assessments. As "monthly" home affordability decreases, the additional mello roos tax weighs heavy on the decision to purchase a new home vs. a pre-owned home in a non-mello roos zone. As developers drop the price of new homes in mello roos zones to compensate, downward pressure is placed on pre-owned homes.

No discussion of this topic can be complete without some consideration of the risk of potential shocks to the system. Is another 9/11 scale attack in the works to test a new president? What about severe disruption of our oil supply or refining capacity (anyone remember Katrina)? What impact could the large California earthquake that our geologists are calling inevitable in the next 20 years have on the market? I no events of this magnitude will happen, but history is the best guide and events of this nature could drastically alter market conditions locally or across the nation.

No matter how you look at shrinking/growing inventories of new and pre-owed homes or the improved balance sheet of some home builders, you have to consider the monthly affordability of homes. When the price of a home is not increasing $100k/year, that places an entirely different perspective on the monthly affordability and speculation equations. When there are no longer windfalls from a tech bubble, cashing in stock options for a large down payment is not an option. One bubble can no longer beget another. Speculators flee to the next perceived opportunity and the housing market are rationalized by historic medians, which focuses us on monthly affordability.

It is clear that the bubbles have burst. Anyone who claims to know with confidence where the bottom will be found in the housing market is speculating.