2021 Housing Market Looks Strong, But Builder Stocks are Sliding
The housing market looks like it will have a strong start in 2021. However, a report released on January 10 suggests that home builder stock values are likely to drop from their recent high levels. This report was issued by the RBC Capital Markets group. There are several reasons why the housing market is expected to remain strong and a few possible reasons why home builder stocks are likely to drop in value.
Enthusiasm Around the Housing Market Is High
There is a lot of enthusiasm around a strong housing market. The year is off to a strong start, even just 10 days into January. One analyst said that the expectations were already high, and they are not advancing them any further. Even so, they expect the housing market to meet the current level of expectations.
Expectations Lowered for Home Builder Stock
Publicly traded home building companies are likely to see a drop in their stock values in 2021. Analysts have already lowered their expectations by 6%. They feel that some obstacles could limit stock performance as the year 2021 marches onward. It's not that the demand for new homes will decrease. The analysts are basing their lowered expectations on builders being the victims of their own successes. They have to compete against themselves. Their ability to keep growing is not infinite. Their recent successes make it difficult to keep up the pace. This is why the analysts expect the rate of growth to decrease, and that is why the expectations for home builder stock values are lower for 2021 than they were in 2020.
Changes in Home Sales
Summer and autumn were strong for home builders. In November, home sales fell by 11% compared to October. That was expected. In November, home builders shifted to finishing the homes they already started instead of starting new homes.
Prices Are Expected to Rise
Another factor in slower home growth rates and dropping home builder stock values is an expected price increase. Builders are increasing their prices in attempt to curb demand. They need to curb the demand somewhat in order to keep up pace with interest and orders. At the current prices, they can't keep up. Ongoing low interest rates are also making homes attractive to buyers.
What Affects the Prices of Home Builder Stocks
The stock values of home builders are usually lower during times of slower growth. There is also a chance that a new chairperson of the Federal Reserve of the United States could raise interest rates. That would also curb the current level of demand because it would cost more for a consumer to borrow money for the home.
Increasing Supply Costs
In 2020, home builders were plagued by higher supply costs. In particular, the price of lumber increased by a rate that was much faster than inflation. This reduces their margin. Competition for land has resulted in plots costing more for home builders to purchase.
Consumer Sentiment Remains High
There are still millions of people who want to get into the real estate market. So far, a lot of them have been priced out of it. Job losses caused by the COVID-19 pandemic required a lot of people to put their plans on hold. Even people who did not lose their jobs were facing a lot of economic fear and uncertainty. The tumultuous 2020 presidential election and the ensuing political ruckus has also played a role. In urban areas, protests and riots may have gotten in the way of people putting their homes on the market. Real estate agents have been weary of holding open houses because of COVID-19, and political and civil unrest have not helped the situation. Even so, people are making offers on homes, even without setting foot in them. Instead of touring homes in person, they're doing virtual tours. There are more people who want to buy a home than there are homes for sale.
New Presidential Administration Could Affect Home Sales and Home Builder Stocks
As President-elect Joe Biden plans his first 100 days and selects cabinet members, people expect the administration to enact some changes that will affect the housing market. The Biden administration is likely to enforce fair housing policies. The administration also wants to continue the moratorium on evictions and foreclosures until the majority of Americans who want a COVID-19 vaccine are able to get one.
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