Housing Plays For The Coming Exodus Out Of Big Cities
- The attractiveness of living in high-cost big cities has certainly lost some of its luster over the past few years.
- First, we had the SALT caps of 2017 Tax Reform Act. Recently, places like NYC have been hit hard by COVID-19 lockdowns as well as riots.
- With employers getting much comfortable with a more 'virtual' work force, smaller cities and more rural single-family housing could benefit from the coming exodus from bigger cities.
- We take a look at this potential emerging trend and offer up some investment picks that should be beneficiaries of this exodus in the paragraphs below.
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"City life is millions of people being lonesome together." - Henry David Thoreau
The attractiveness of big cities has lost a lot of their luster in 2020. First, we had the COVID-19 outbreak that hit the large metro areas much, much harder than the small cities and more rural regions of the country with New York City being the epicenter for coronavirus deaths.
This led to nationwide lockdowns for several months across most of the nation which spread the misery countrywide, but specifically in high-density cities. Trust me, if you have ever had a 600-foot apartment in New York City being trapped inside for a few days because of inclement weather is not pleasant. I can't imagine what this is like to do for three months.
Then came the riots and looting over the past ten days across Minneapolis, Los Angeles, New York, Atlanta and other major metropolitan areas; of which frustration with the lockdowns had to play a part in my opinion. People thinking about leaving big cities at the beginning of this year, almost have to be leaning more and more in that direction now.
Another factor that should be a major enabler of such a move, is the recognition by employers during this pandemic that the technology exists to have a more 'virtual' workforce and there are many benefits to having one. This is one key reason Zoom Video (ZM) has been a big winner in 2020 for investors. Places like Twitter (TWTR), Alphabet (GOOG) (GOOGL), Facebook (FB) and others have come out and stated they envision a significantly larger amount of their work forces working offsite in the years ahead.
This was already a trend before COVID-19 as can be seen by the slide above that FlexJobs put out in mid-February of this year. The coronavirus outbreak and the accompanying impacts poured gasoline on that fire.
This exodus has already been happening from many major big cities over the past decade. This migration accelerated with the tax reform act package passed late in 2017 that capped deductions for property taxes, mortgage interest and state taxes. This made high tax places like NYC, San Francisco and Chicago even more expensive to live especially if you owned residential real estate. In addition, if you have school-age children, paying for private school to avoid a mostly decrepit public education system is another pricey proposition.
Add in a surging homeless problem in most of the major cities in recent years, the impetus for lower-priced more rural areas with better schools, lower taxes, with a significant reduction in the cost of living has rarely looked more appealing. As working virtual keeps becoming easier from a technology perspective and employers are increasingly comfortable with this arrangement, staying in large cities will become less and less appealing.
This development should be good for single family-housing in lower density/lower-cost regions throughout the United States. This out-migration from high tax/high-cost areas was already a long-term trend throughout the country. Given the recent developments described above, it is hard to see this migration not accelerating in the years ahead.
In addition, the housing market already had some tailwinds that should play out in the second half of the year. Let's start with the obvious. The COVID-19 meltdown has triggered a massive decline in interest rates. The 10-Year Treasury Yield is under .8% despite a massive increase both in national debt and the Federal Reserve's balance sheet.
The average 30-Year mortgage rate is around 3.3% with a 15-year fixed mortgage goes for around 2.7%. Growing up in the 80s, my late father would have killed to get something even more than double this rate. Obviously, the carrying cost of a house from a mortgage payment perspective has historically never been lower. Prior to COVID-19 blindsiding the global economy, the U.S. housing market had been projected for growth.
Second, while it is true that more than 40 million Americans have filed unemployment claims in the past ten weeks thanks to most of the nation being in virtual lockdown mode for the past two to three months; most of these job losses will prove to be temporary. Most of these positions should come back as the country reopens on a state-by-state basis. While the 'moral hazard' we highlighted the other day could impede this job snap-back temporarily, we should have a fuller picture of how many of these job losses were permanent by the end of summer.
More importantly, at least from a housing market perspective, is that the vast majority of the layoffs and furloughs that have occurred in low wage industries like hospitality, restaurants and retail. Most of the affected individuals to date make $40,000 annually or less. To be blunt, these are not a significant part of single-family housing buyers.
So which companies should benefit from these trends? Obviously, homebuilders are one sector that should be the beneficiary of a rising housing market. The easiest way to gain exposure to this sector of the economy is to buy the SPDR Homebuilders ETF (XHB). The ETF has had a nice bounce-back from its late March COVID-19 meltdown lows, but still around 10% below highs hit earlier this year.
On an individual homebuilder perspective, my favorite homebuilder is LGI Homes (LGIH), as it has been for several years. I last teed up this name in mid-April for the Seeking Alpha community. The stock has run up over 70% since then. I would not be chasing it at these levels. However, I would feel comfortable adding to this position if it fell back to the high $60s.
Beazer Homes (BZH) has made a nice move over the past month but still is far below the shares' highs earlier this year. Beazer is more of a turnaround story than LGI Homes, so I would add exposure via covered calls for those comfortable with simple option strategies. Accumulating the stock over time is another option.
The company had a solid second quarter (the company operates on a different fiscal year than most) when it beat both the top and bottom line consensus when it reported second quarter results on April 30th. Obviously, this homebuilder will have some sort of COVID-19 impact in its second quarter results. Cancellation rates rose sharply in March. However, Beazer was already seeing some significant improvements to numbers by April (see above slide). The company's balance sheet is also in good shape with nearly $300 million in unrestricted cash and with most of its debt maturities past 2025 and beyond.
Home furnishing names could also get a nice boost from both a recovering housing market and the aftermath of most of the nation sheltering in place for months. How many families are going to prioritize upgrading their dining room, bedroom or home office after being in virtual lock down for months over a trip to Europe this year? My guess, probably quite a few given the caution around global travel that will exist for some time and the amount of time they just spent cooped up almost 24/7 in their homes.
Source: Company presentation
Hooker Furniture (HOFT) is one name that seems to make sense here. Hooker makes home entertainment, home office, accent, dining, and bedroom furniture for a variety of segments. The company beat both top and bottom line expectations with first quarter results that came out in April. The company will manage to remain profitable this year despite the difficult macro environment. Analysts are expecting a big rise in profitability in FY2021 according to the current consensus. The stock trades at approximately ten times next year's expected EPS. The shares also yield north of three and a half percent as well.
Those are some thoughts on potential beneficiaries on the possible exodus from high-cost big cities in the years ahead.
Ending on a personal note, I will be a part of this trend described in the article. I am giving up my apartment in NYC at the end of this month. Soon I will also move out of my place in Miami for a sleepy beach community called Delray, ninety minutes north of here. I look forward to a less hectic lifestyle and having sands in my toes on a more regular basis.
"A great city is not to be confounded with a populous one."- Aristotle
Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum"
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Analyst’s Disclosure: I am/we are long BZH, HOFT, LGIH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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