In the fast-paced world of economics, predictions and trends can change in the blink of an eye. In October 2022, Jay McCanless from Wedbush Securities shared his insights on the housing market with Joel Elconin on the PreMarket Prep Plus show. Fast forward eight months, McCanless revisited the show to discuss how the market has evolved since. This article contrasts McCanless’s observations and calls from October 2022 with the market in June 2023.
Interest Rates and Federal Reserve: Then and Now
Back in October 2022, McCanless highlighted that the Federal Reserve had been taking aggressive actions to slow down the housing market. He believed that despite the Fed’s actions, the demand from millennials and Gen Z would eventually overwhelm any negative sentiment.
As of June 2023, the Federal Reserve’s actions have led to a diminishing supply of homes, as people are reluctant to sell their homes and abandon low mortgage rates. Despite higher mortgage rates, the National Association Home Builder Confidence Index showed that home builders are expanding and people are still interested in buying homes.
Home Builders Strategy: Learning From the Past
McCanless observed that home builders had become more prudent since the 2008 housing crisis. They were keeping their debt levels lower and being more cautious with land and cash deployment. Input costs such as lumber had recently decreased, and labor savings were expected to reflect in the first half of 2023.
The lack of supply in existing homes has restored pricing power for home builders in most markets. New home listings have increased to almost a third of total listings, due to people’s hesitancy to move and the lack of existing homes for sale. Though demand is high, labor remains in short supply for nearly every part of the build cycle, noted Jay.
Home Builders Spotlight
McCanless had a neutral stance on PulteGroup with a price target of $47, as they were focusing on entry-level homes but facing supply chain and municipal permitting issues.
McCanless did not discuss PulteGroup in the recent interview, but the stock (NYSE: PHM) has far surpassed Jay’s initial $47 target. As of writing this article, the issue is trading in the $75 range, up about 100% since October 2022 levels.
Taylor Morrison Home Corporation and Century Communities, Inc.
McCanless was positive on Taylor Morrison due to their better-than-expected earnings and stock buybacks. He was also positive on Century Communities due to their focus on entry-level homes.
These companies were not discussed in the recent interview, but both Taylor Morrison (NYSE: TMHC) and Century Communities (NYSE: CCS) are up from October 2022 levels as of writing this article, by +90% and +60%, respectively.
Meritage Homes Corporation
McCanless believed that Meritage Homes was well-positioned for market demand due to its focus on entry-level homes and stock buybacks.
McCanless remained positive on Meritage Homes, which now generates about 85% of its revenue from first-time and first move-up buyers and has a solid market position in the West, Texas, and Southeast. In this case, Meritage Homes (NYSE: MTH) is up by +100% since October 2022 levels, as of writing this article.
Tri Pointe Homes, Inc.
McCanless was positive on Tri Pointe Homes in the long term but noted that they might be under pressure due to slower activity in the Western parts of the country, due to their ~40% exposure in the area. His target was about an 80% move up.
Tri Pointe Homes surpassed McCanless’s target, and he mentioned that it needs to be reevaluated. The company could benefit if the positive trends for Lenar and KB Homes continue. Though Jay had some points to not be as bullish on Tri Pointe (NYSE: TPH) compared to other home builders, the stock has outperformed most of its peers, surging over +110% from October 2022 to June 2023.
Toll Brothers, Inc.
McCanless had a neutral stance on Toll Brothers and was surprised by how quickly the luxury buyer segment went to the sidelines.
Slightly surprised again this year, Jay noted buyers from across the spectrum, from entry-level to luxury, have been out looking to buy houses. This has benefitted Toll Brothers (NYSE: TOL), instigating over a +80% move from October 2022 lows to where the stock sits in June 2023 as of writing this article.
The Evolving Housing Market Landscape
In October 2022, McCanless emphasized that if builders could meet the payment requirements of buyers, the demand was still there, especially for entry-level homes. He mentioned that the demographic wave of millennials and Gen Z would be a longer-term demand factor.
By June 2023, McCanless remained optimistic about the home builders and building products sectors due to current market trends and data. He underscored the importance of supply, mortgage rates, and job numbers in influencing the market. The lack of supply in existing homes has allowed builders to regain pricing power quickly.
The housing market has seen significant changes between October 2022 and June 2023. The Federal Reserve’s aggressive actions led to a decrease in the overall supply of homes, and despite higher mortgage rates, there was still a strong demand for new homes. Home builders adapted their strategies, and certain companies, like Meritage Homes and Tri Pointe Homes, have shown market-outperforming trends.
Jay McCanless’s insights highlight the dynamic nature of the housing market and the importance of monitoring changing trends and data. As the market continues to evolve, it will be interesting to observe how the predictions and assessments continue to play out in the coming months.
June 2023 Show