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How Long Will Red-Hot Housing Market Last?

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EDITOR NOTE: One industry that took everyone by surprise during the pandemic last year was home improvement. It made sense, though, as everyone, stuck at home, found one way to productively use their stimulus checks. But despite the dismal employment scenario that unfolded in the months following the first Covid lockdown, new home sales rose along with refis and the housing market in general. Low-interest rates were too good to pass up. Since then, the demand for single-family homes has driven-up new home prices. And with the shadow of inflation on the horizon, rising bond yields have begun to dampen the longer-term prospects for the real estate sector. Home Depot declined to give any earnings or revenue guidance for 2021. That’s an ominous sign that extends well beyond the home industry to every household’s financial concerns. In other words, it’s time to hedge your wealth as the value of your hard-earned dollars is about to undergo a significant decline. The cost of basic goods and services is about to surge to nearly-unaffordable levels.

The housing market is still red hot. But there are growing concerns about how much longer this strength can last.

Home Depot (HD) reported earnings and sales that topped Wall Street's forecasts Tuesday. Lowe's (LOW) also reported better-than-expected earnings and sales on Wednesday morning, and CEO Marvin Ellison said in a statement that sales were lifted thanks to "broad-based demand driven by the continued consumer focus on the home."

Still, rising interest rates could eventually be a problem for Home Depot and Lowe's. Even though the Federal Reserve is expected to keep its key short-term rate near zero for the foreseeable future, longer-term bond yields have started to spike. And mortgage rates are influenced more by the 10-year Treasury than Fed rates.

In an ominous sign, Home Depot declined to give any guidance for 2021. Its shares fell 3% on the news.

"Increased demand for single-family homes has driven housing turnover and home price appreciation," said Home Depot chief financial officer Richard McPhail during a conference call with analysts Tuesday. "However, significant uncertainty remains with respect to the course of the pandemic, the distribution of vaccines, short-term fiscal policy and how these developments will impact the broader economy and ultimately, consumer spending."

For now, it appears that consumers are not too concerned.

The latest housing market numbers still paint a healthy picture. Consumers are eager to find more space and are willing to pay ever higher prices for homes.

S&P/Case Shiller and the Federal Housing Finance Agency reported a more than 1% monthly increase in their latest housing price reports Tuesday.

"Both surveys suggest strong momentum and support our view that the housing market remains in solid footing," said Blerina Uruci, an economist with Barclays, in a report.

The housing market strength is helping to lift the prices of lumber too, which has also boosted Home Depot. Ted Decker, the retailer's president, said during the earnings call that "during the fourth quarter, pricing for both framing and panel lumber" surged, helping to lift overall sales.

Forestry companies have benefited from the housing boom and soaring lumber prices as well.

Two timber exchange-traded funds with the ticker symbols of WOOD and CUT -- the iShares Global Timber & Forestry (WOOD) and Invesco MSCI Global Timber (CUT) ETFs -- are each up more than 5% this year and have both gained more than 25% in the past 12 months.

Builders remain confident that the housing boom won't come to an end just yet.

Toll Brothers (TOL) reported earnings and sales after the market closed Tuesday that easily beat analysts' expectations.

"The housing market remains very strong, driven by a tight supply of new and existing homes for sale, favorable demographic trends, low mortgage rates, and a heightened appreciation for home ownership," said Toll Brothers CEO Douglas Yearley, Jr. in the earnings release. He added that he expects these market conditions "to continue for the foreseeable future."

Originally posted on CNN Business

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