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As we’ve discussed, the real estate market has been very exuberant in recent months. According to the National Association of Realtors, August total existing-home sales were up 10.5% from a year ago, and the median existing-home price was $310,600, up 11.4% from August 2019, marking the 102nd straight month of year-over-year gains.
Even if you’re not in the market to sell a house, it’s still possible to benefit from this market. Let’s take a look at three of the investing areas benefiting from the real estate boom. One caveat: We don’t know how long this current seller’s market will last.
Homebuilder stocks set to have strong Q3 results
The Census Bureau reported August new home sales were 4.8% above July and 43.2% above the August 2019 estimate of 706,000. The median sales price of new houses sold in August 2020 was $312,800, while the average sales price was $369,000. The inventory of new houses for sale at the end of August was 282,000, a supply of 3.3 months at the current sales rate.
All of this is great news for homebuilders, many of which saw record sales and activity in the second quarter of 2020. Here are some examples:
- The stock of D.R. Horton (NYSE: DHI), the largest homebuilder by volume, hit a low of $28.78 in March and now trades around $75 a share. It closed 61,164 homes in the 12-month period ended June 30, 2020. D.R. Horton has seen sales and revenue increase in recent months.
- Lennar (NYSE: LEN) stock hit a low of $29.35 in March and has been trading at over $80 a share in early October. It’s increasing its annual dividend from $0.50 per share to $1.00 per share. Lennar’s third-quarter earnings reflected earnings per share of $2.12. Skyrocketing home sales caused the company to revise its future guidance upward and is expecting this trend to continue for several years.
- Meritage Homes (NYSE: MTH) set an all-time company record for sales this year. The stock has risen from a low of $27.29 in March to over $102 per share in recent weeks. Last month, Meritage announced a 73% year-over-year jump in total home orders for July and August combined.
Rising home values mean more home improvement
In a market where prices are increasing, homeowners tend to be aware the value of their homes may increase as well. This may encourage them to attempt a remodel or home improvement project. In this real estate cycle, there’s another factor to consider: the fact COVID-19 has made many people consider the limitations of their homes. Remodeling was up over the summer, and this trend is expected to continue.
This has been good news for general contractors and some real estate stocks. Home Depot (NYSE: HD) has been a great income stock over the years, paying a dividend for 133 consecutive quarters. It hit a low of $152.15 in March and as of early October 2020 is around $269. Its biggest competition, Lowe’s (NYSE: LOW), fell to $65.02 per share in March and now trades around $160. The competition between these two companies is intense, but both are benefiting from the real estate market, as are companies that make products sold in these stores.
One example is Sherwin-Williams (NYSE: SHW). It isn’t a real estate stock, but it sells paint, and it did have to close stores temporarily during the pandemic. However, its sales to its retailer partners rose during that time. Shares have gone up from a low of $396.70 earlier this year to now around $697. It also recently increased its net sales guidance for the third quarter of 2020.
Other stocks that could benefit from continued construction and remodeling include Fastenal (NASDAQ: FAST), which sells bolts, screws, and nails, as well as other industrial supplies.
Strong sales numbers have sent real estate brokerage stocks up
When the housing market stalled out earlier in the year, real estate companies felt the pain, and some, such as Redfin (NASDAQ: RDFN), furloughed employees and agents. But with the robust summer market kept real estate agents busy, Zillow (NASDAQ: Z) (NASDAQ: ZG), Redfin, and other similar companies have seen stocks rise, especially as iBuying rolled out again in many markets.
Although sales are constrained by low inventory, both Zillow and Redfin have reported spikes in traffic to their websites, and their stock has also risen. Redfin hit a low of $10.33 in March and now trades for around $50. Zillow’s stock has soared to over $100 per share. Traditional brokerage stocks such as RE/MAX (NYSE: RMAX) and Realogy Holdings (NYSE: RLGY) have also experienced a lift.
How long will it last?
Trying to predict when the market will shift is a fool’s game. Traditionally, fewer people list their homes during the winter months and the market heats up again in early spring. That pattern could be different this year. If inventory remains at low levels, existing home sales could slow, and there’s always a concern foreclosures could tick up if the economy lags and a second stimulus isn’t passed.
For the time being, however, the residential real estate market is strong, providing nice tailwinds for many real estate stocks.