Homebuilding stocks are riding the wave of investor optimism. An S&P index of homebuilders has nearly doubled since cratering on March 23 and is now down just 2.8% for the year.
In some ways, Toll Brothers Inc. embodies the mixed messages of the recent housing recovery. The luxury builder said Wednesday that orders dropped 22% in the second quarter, pulled down by a steep plunge starting March 16.
But buyer deposits, which the company called a leading indicator, are up 13% year-over-year in May and reached the highest level since 2005 last week, the company said. After it reported results, the company’s shares spiked when trading opened in New York on Thursday, but the stock finished the day down. It’s dropped 18% this year, worse than the 5.8% loss for the S&P 500.
Dark clouds hang over housing. Job losses have hit lower-paid workers in retail and hospitality particularly hard, but the real estate market may increasingly feel the strain as unemployment moves up the income scale.
Steve Hilton, the chief executive officer of Arizona-based Meritage Homes Corp., recently said 40% of the newly unemployed Americans make less than $40,000 a year and people who work at hotels and restaurants are “generally not our buyers.” The same is likely true at Toll, where customers pay an average of more than $800,000 for new homes.
Homebuyers are already facing challenges. Credit is tightening and bargains aren’t particularly easy to find. Before the crisis, there was a shortage of affordable homes and that’s gotten worse with many sellers deciding to pull back. Bidding wars are erupting in some places where homes are in the shortest supply, including San Francisco and Boston.
Many who apply for mortgages, looking to take advantage of low rates, may not qualify or won’t find something they like in their price range, said Matthew Pointon, property economist for Capital Economics. The recovery in sales may be delayed until later this year, he said.
For now, housing has held up better than expected in the pandemic. But with unemployment high and the economy facing a long recovery, the rebound could sputter.
“It’s going to be difficult to see housing expand strongly until we start to get a better recovery in the job market,” said David Berson, chief economist at the insurance and financial services company Nationwide.
This article was provided by Bloomberg News.