Here's Why I Only Own Three Housing Stocks Right Now
This is how I see trends working out for 2025, why we're a long way from the bottom, and how I'm cautiously playing the market.
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U.S. home prices ticked down 0.1% in April, on a seasonally adjusted basis. Notably this was the first month-over-month decline since the summer of 2022. That was when the Federal Reserve was in the middle of its most aggressive monetary tightening since the days of Paul Volcker and mortgage rates were moving sharply higher.
It should be noted that on a year-over-year basis, home prices did officially increase 4.1%. This slowed from the 4.9% pace in March and was the smallest annual price growth since July of 2023. But it is important to keep in mind that average new home prices are significantly overstated when housing demand dries up. Homebuilders are using much higher incentives like mortgage buydowns, "flex cash" and free upgrades to move their growing levels of inventory. These do not show up in average new home prices and have been moving sharply higher in recent quarters.
Hovnanian Enterprises HOV reported in the first quarter that these incentives accounted for 9.7% of home sale revenues. That is more than triple where they were a few years ago when the housing market was hot. Obviously, this has some significant implications. First, new home prices are already falling in many regions of the country. As Wolf Street again pointed out this week, home prices in many cities like Austin and Tampa are already down significantly from their peak. Here in the Miami area the housing sector appears to be noticeably weakening. It will only get worse from here. Massive construction cranes dot the skyline from Coconut Grove to midtown, making the tail end of the housing boom more than 15 years ago look prudent in comparison. Except now they are building 60 to 100 story skyscrapers instead of 30 to 50 story ones from the previous era.
Given housing downturns tend to run three to five years, we are a long way from the bottom. Especially as housing affordability remains near historical lows and average mortgage rates have moved back over seven percent. Home builders in response are likely to continue to slow the pace of building. Given housing activity makes up 15% to 18% of the economy, this is likely to become a bigger economic headwind as we move through 2025. Higher incentives will also increasingly hit the margins for home building companies and adversely impact their profits. Tariff impacts should also increasingly affect home builder margins in the quarters ahead.
I also expect M&A activity to pick up across this fragmented industry in response to increasing financial stress. United Homes Group (UHG) announced earlier this week that it is exploring potential strategic alternatives. I believe many such small home builders won’t be around or will be a part of larger enterprises before housing bottoms.
I remain underweight the sector and have only three housing-related plays in my portfolio. The St. Joe Company JOE, Beazer Homes BZH and Forestar Group Inc. FOR. They all have one thing in common: They trade significantly below their stated book values and in the case of St. Joe, true book values. Therefore, they provide a solid margin of safety should the housing sector continue to turn down, which is my baseline scenario. In addition, all three stocks have good liquidity in the options against their equities. This allows me to hold these shares within covered-call positions, increasing that margin of safety further.
At the time of publication, Jensen was long BZH, FOR, and JOE
