An Actual Housing Bargain By Spencer Jakab

After investors took Walmart's everyday low prices too literally Thursday, stocks are set for a more subdued open. The mighty dollar, meanwhile, is flirting with its lows of the year. An updated reading on consumer confidence at 10 a.m. ET is the day's most-watched data point.

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If you had told a home builder's board five years ago that they were about to face a global pandemic, a doubling of mortgage rates, the highest inflation in decades and a labor shortage, they would have been aghast.

But it was a golden era for them: Eight leading U.S. residential construction companies-six builders and two suppliers-grew their earnings per share by 230% on average through 2024. Now analysts polled by FactSet predict every single one's profits will drop this year.

A popular exchange-traded fund tracking the sector, which surged in line with those earnings, is down by more than a fifth since October. This week, a National Association of Home Builders survey also showed surprisingly weak confidence.

People who already own homes are mostly feeling fine, though some would like to move. The golden handcuffs imposed by locking in cheap mortgages make it hard. That conundrum contributed to the surprising financial bonanza for home builders.

Many buyers reached their limit financially , though. An index of home affordability maintained by the National Association of Realtors based around 100, when a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home, fell as low as 91.6 last summer.

Prices are cooling now, and builders haven't been sitting still either. Before the housing boom, two-thirds of new single family homes were 2,400 square feet or less, according to the Census Bureau. That got as low as 44% in 2015, but it's well above half again. Suppliers also talk about "de-contenting" these smaller homes -fewer granite countertops or fancy fridges, for example.

Penny-pinching could intensify if tariffs and an immigration crackdown take place. About a third of appliances and certain types of lumber are imported and much of the industry's labor force is foreign-born and undocumented.

A media search for the phrases "home shortage" or "housing shortage" on intelligence platform Factiva turns up two-and-a-half times as many results in the past three years as during the three prepandemic years. Normally "shortage" really just means prices are high .

Now, though, supply and demand are oddly off kilter. A Redfin analysis of 2022 data reported on last year by The Wall Street Journal showed that about 28% of U.S. homes with three or more bedrooms were owned by people between the ages of 60 and 78 living by themselves or with one other adult. Millennials with children owned only 14% of such homes.

Unless mortgages get cheap, empty-nesters and young families will be slower than usual to pass the generational housing baton. People still want single family starter homes, though. Builders will figure out how to fill the void with even more modest abodes , including modular ones.

At least people looking to buy an affordable fixer-upper on the stock market are in luck: The six builders fetched 12.7 times trailing 12-month earnings on average before the pandemic and average only 9.2 times today.

With tech stocks near a record, that could be an opportunity to re-deploy gains into a less-loved sector. It's almost like playing with house money.

Stocks I'm Watching

Celsius Holdings : The energy drink maker's results weren't as bad as feared, and it announced an acquisition on Thursday , sending its stock up by a third in premarket trading.

Floor & Decor : In a positive sign for big box home improvement retailers who have yet to release quarterly earnings, the smaller company's results sent its shares up sharply in early trading.

Alibaba : The Chinese e-commerce giant said the magic word: "AI." Its solid results and plans to invest in the technology sent its shares up premarket after a big gain Thursday.

Nissan Motor : The Financial Times reported that a Japanese group would approach Elon Musk's Tesla about taking a stake in the struggling automaker that had been seeking a merger with Honda. Funding secured?

Block : The parent of Cash App and Square is looking chipped in early trading following weak results.

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About Me

My name is Spencer Jakab and I've been musing about money and markets for more than 30 years, including editing The Wall Street Journal's Heard on the Street column for a decade, writing two investing books and running a team of stock analysts at a global investment bank.

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This article is a text version of a Wall Street Journal newsletter published earlier today.

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February 21, 2025 06:33 ET (11:33 GMT)

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