Wedbush Analyst Jay McCanless joins Yahoo Finance Live to discuss the outlook for the housing industry and home builders.
- Welcome back. You can call it the perfect storm for the housing market, with high mortgage rates, a hawkish Fed, and recession on the horizon. The last time home prices fell this quickly was during the global financial crisis. And though home prices have fallen from peaks in most major US cities, they are still some way above the 2019 levels. But homebuilder sentiment has been down, dwindling. So what does the demand picture look like? And what's the investment argument?
Let's get into that conversation with Jay McCandless, Wedbush Securities senior vice president of equity research. Let me just ask you the headline question here. What are we to make of the latest data here and with these soaring prices and home affordability in the crosshairs?
JAY MCCANLESS: Yeah. Good morning. Thanks for having me. Longer term, I think the picture for shelter demand, whether that's for-sale housing, for-rent housing, or multifamily for rent, we still think is very strong. You look at rent growth, double digit percentages up pretty much the entire year for single family and for multifamily.
And what we're hearing from the builders is that even with these higher mortgage rates, if they can find a way to get to the affordable payment, whether it's a function of buying down the rate a little bit, maybe taking a little bit off the base price of the home, if they can solve for that monthly payment that the buyer needs, then the buyer is still willing to purchase the home.
We think also the demographic tailwind of the millennials that are fully in household formation phase right now along with the Gen Zs, which is also a very large population demographic. There's lots of tailwinds out there. But I think near term, you're absolutely right. This is a much trickier environment that I think the builders would have expected, especially given how strong the beginning of the year was.
- And there's almost a substitution effect going on that I've been able to glean from your notes. Correct me if I'm wrong. But given the fact that there's not as much demand, perhaps, for new homes for people to buy, rental properties, we're seeing a surge in demand in those as people are forced to shell out money for rent instead of a mortgage. How are those trends looking?
JAY MCCANLESS: They're actually looking pretty good. And what we've heard from our home builders is that you're not going to completely replace consumer demand with the demand from the single family and the bill to rent landlords. But it is a more affordable option for people. And it also, for the homebuilders we cover, it gives them an option to be able to sell maybe some homes that they couldn't have sold in this mortgage rate environment.
So it's not going to fully replace the consumer. But, yes, I think the demand for housing, rental housing especially, is out there. And it's providing affordable housing for the consumer, but also a means of selling some homes that the builders have maybe built in expectation of the consumer wanting them and now they're going to sell it to these institutional landlords. Either way, the emergence of this new FIRE class over the last decade I think has been a win-win for both consumers as well as the building industry.
- That's interesting. When you say FIRE, you're talking about finance, insurance, real estate, I believe. Just in terms of input costs, we can look at the materials. And we can get into lumber prices. We can also get into wages that are paid. And I think that's appropriate to talk about because we just got a bunch of data this morning from the BLS on the job front. How about these sources of costs for these businesses?
JAY MCCANLESS: So for the-- our thesis around the jobs that as long as we're seeing some type of continued job creation, that is going to be good for demand, good for the industry because, typically, job growth leads us into recovery, and job declines typically precede tougher times for the builders. So good to see that we are still growing the jobs picture.
In terms of input costs, what we've seen is that lumber prices, which have been extremely volatile for most of COVID, actually had a pretty benign quarter this past quarter in the third quarter. Lumber framing prices were down about 15%. So if you think about a little bit of a tailwind there from lower lumber costs helping to offset some of the costs that the builders are having to pay to buy down mortgages and maybe cut prices a little bit. So a little bit of relief in a tougher environment.
And then on the wage front, what we've seen is that affordability up until this meteoric rise in mortgage rates from 3% 18 months ago to nearly 7% I think this morning is where they're sitting. Even with the wage growth that we've seen out there, it's hard for affordability to keep up when you see that type of meteoric surge in mortgage rates.
- Yes. And let's get into some of the investment opportunities for people in the audience. You have a couple of names that I'm interested in going over. Green Brick Partners, Builders FirstSource, building products, Masonite, any of those names you care to describe here and what you're seeing in those stocks.
JAY MCCANLESS: Yeah, absolutely. So Green Brick, we have a neutral rating on it. But if you think about where some of the pain has been in housing, we've seen I think a little bit more of it out West. Green Brick actually does the majority of their business in Atlanta and Dallas, which are two markets that have held up pretty well and haven't really felt some of the effects of layoffs from the tech sector that like a Raleigh and an Austin have felt. So we're new traded on that name. But I think if you're trying to avoid some of the trouble spots in housing right now, Green Brick is an interesting name.
Builders FirstSource is a company that supplies lumber and other products that go into the home. They're about 10% of the domestic building products market now. The decline that we saw in lumber prices this past quarter typically is not as good for them.
But if you think about their ability to grow market share and get bigger in this environment, especially because they don't just sell to single family builders, they also sell to multifamily, selling to commercial, which we've seen commercial construction spending actually start to rebound over the last six months. So even though they may be a little bit slower demand for their single family product, they do have other avenues that they can sell into.
- We're going to have to leave it there. But appreciate your insights into the housing and construction markets. Jay McCandless, Wedbush Securities senior vice president of equity research.