The U.S. economy experienced an unprecedented disruption over the past few years. Many sectors were caught up in the sudden stoppage of the economy in 2020, followed by an incredible boom thereafter. Housing stocks were among those that took part in this cycle, as people sought to upgrade their living conditions at record speed during the height of the pandemic.
However, the housing boom appears to be coming to an end. Interest rates have soared over the past two years. This makes it much more expensive for potential home buyers to finance their purchases. Soaring inflation has pressured consumers’ wallets as well, offering an additional challenge for meeting larger monthly mortgage payments.
This cold reality is starting to be reflected in the data. Prior to the onset of COVID-19, U.S. building permits tended to be in the 1.3-1.4 million range per month. This spiked to as high as 1.9 million per month in 2022 as homebuilders sought to cash in on the surge in prices.
Now, though, things are heading back to pre-2020 levels. April 2023 housing permits fell to 1.42 million, down dramatically from 1.82 million in April 2022. Given the recent trajectory, it’s possible housing permits will end up falling well below where they were in 2019 before the downturn ends. All this bodes poorly for these three housing stocks.
Rocket Companies (RKT)
Rocket Companies (NYSE:RKT) is one of the largest mortgage underwriters in America.
It enjoyed a breathtaking period of success over the past few years. Revenues soared from $4.3 billion in 2018 to $15.9 billion in 2020. Rocket went public during this period, and quickly became a popular meme stock.
However, as with other meme stocks, the prosperity wouldn’t last. As the pandemic-induced housing boom started to cool, and rising mortgage rates took their toll, Rocket’s revenues have collapsed.
For 2022, revenues plunged to just $6.0 billion, down well over half from their 2020 peak. The numbers were grim. And, in 2023, analysts project another massive decline, with revenues set to slump to less than $4.0 billion.
Rocket struggled to remain profitable in 2022. And with revenues continuing to plunge in 2023, expect a string of losses for Rocket this year. RKT stock is up 11% year-to-date, but I expect the stock to end up well in the red over the next few months.
Weyerhaeuser (NYSE:WY) is one of the world’s largest timberland companies. It operates as a real estate investment trust (REIT), and investors tend to own this stock for its steady stream of dividends tied to the sale of lumber.
The issue with Weyerhaeuser, and other such lumber REITs, is that demand for building materials has plummeted. This is reflected in the price of lumber.
Lumber futures peaked at nearly $1,700 per 1,000 board feet back in 2021 at the height of the housing boom. Now, though, the price has collapsed to a meager $344, representing a more than 75% peak-to-trough decline.
For a company that makes money selling lumber, this sort of decline will cause a major hit to earnings. WY stock will be fine in the long-run, and timberland has proven to generate acceptable returns through the full economic cycle. However, over the next couple of years, WY stock will likely struggle given the plunge in lumber prices and housing permits. Meanwhile, Weyerhaeuser’s 2.6% dividend yield isn’t high enough to adequately compensate investors compared to other REITs.
The slump in housing permits will also hit the building materials companies. Trex (NYSE:TREX) is among the housing stocks on this list that fit this category.
Trex is a maker of decking, railings, and outdoor materials and components. It’s no secret that people spent a lot of money upgrading their homes during the pandemic, adding new decks and outdoor living spaces while cooped up at home.
Now, though, Trex faces multiple headwinds. People are less likely to add additional decks and outdoor areas to their existing homes given the weakening economic conditions. And the sharp drop in building permits will limit demand for TREX products related to new home construction.
Oddly enough, TREX stock is up nearly 30% year-to-date. Shares are now trading for more than 35-times forward earnings estimates. This is much too high a valuation, given the rapidly-weakening conditions in the housing industry.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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