When Toll Brothers, America’s leading luxury home builder, reported earnings after the bell on Monday afternoon, CEO Douglas Yearley called the US housing market “the strongest I have seen in my 30 years at [the company].”
Yearley elaborated, but anyone who’s been paying attention could have written the press release. The de-urbanization trend catalyzed by the pandemic, along with a durable shift to work-from-home arrangements and record-low mortgage rates, have created a new housing bubble.
I’ve called this phenomenon “terrifying and comforting all at once.” Regular readers will recall the following passages from an October piece:
On one hand, we should be grateful for any and all bright spots in a virus-blighted year that brought the worst downturn for the global economy since the Great Depression. And make no mistake, the US housing market is one candle that’s burning bright indeed.
Additionally, it’s nice that Americans are buying homes. Home ownership is fundamental when it comes to building personal wealth and it’s generally synonymous with family life which, I’m told, is nice too (although being the unmarried isolationist I am, I wouldn’t know).
On the other hand, the housing boom is a product of the pandemic. The proliferation of work-from-home arrangements and the distinct possibility that, for many workers, such arrangements will be at least semi-permanent, have stoked demand. Meanwhile, the realities of pandemic lockdowns and the inherent danger of living in close proximity to other humans when a highly transmissible virus is infecting scores of Americans every day, have prompted a flight to the suburbs.
Rampant de-urbanization and permanent isolation are not generally seen as positive developments.
I’ve dedicated thousands of words to waxing semi-hysterical about a hypothetical, dystopian future characterized by creepily surreal, teeming suburbs arranged just outside the figurative, and perhaps literal, walls of hollowed-out cities. The linked post — “Collapse Art: De-Urbanization Reimagined” is memorialized in the site’s forthcoming apparel line.
The point is: These trends are a big deal, and Toll Brothers’ Yearley retold the story on Monday. “The strong demand began for us in mid-May and has continued through today,” he said, adding the following:
We attribute the strength in demand to a number of factors, including historically low interest rates, an undersupply of new and resale homes, and a renewed appreciation for the home as a sanctuary. The work-from-home phenomenon is also enabling more buyers to live where they want rather than where their jobs previously required. With the upgrades and choices we offer, our customers can personalize their homes to reflect their lifestyles with features such as home offices, fitness rooms, multi-generational living suites and stunning indoor/outdoor living areas.
Of course, the richer you are, the more accessible those “upgrades and choices” are. In the company’s FY2021 guidance, Toll Brothers sees deliveries of roughly 1,675 homes in the first quarter, with an average price of between $780,000 and $800,000, for instance.
Well, as it turns out, a breakdown of data from the Mortgage Bankers Association shows that demand for mortgages larger than $766,000 easily outstrips demand for loans to buy more modest abodes (or “sanctuaries,” as Yearley put it).
“In FY 2021’s first six weeks ended December 6, demand has remained very strong compared to one year ago, with our non-binding reservation deposits, which are a precursor to contracts, up approximately 48%,” Toll Brothers proudly declared on Monday.
So, all of this should be good news for the shares, right? Apparently not. In fact, the stock was down some 9% Tuesday.
One problem might simply be that the pace is unsustainable. Order growth halfway through last quarter was a ridiculous 110% YoY, so perhaps the full-quarter results and the snapshot of the current quarter don’t quite measure up.
Or maybe investors are worried that mortgage rates could rise. Or maybe — just maybe — the market thinks the vaccine will at least partially reverse the trend. The other red bar in the figure (above) shows the drop in the shares on November 9. That was the day Pfizer first released efficacy results for its jointly-developed COVID-19 vaccine.
Analysts have more nuanced explanations for Tuesday’s weakness, including lower-than-expected guidance for deliveries and margins, and expectations for below-consensus profits next year.
Whatever the case, these last several months will be remembered as a period during which a new housing bubble inflated in America — amid the most turbulent period for the broader economy since the 1930s, no less. Toll Brothers was along for the ride. Net signed contract value for the three months through October was $2.74 billion, up 63%. Contracted homes were 3,407, up 68%.
As Bloomberg’s Cameron Crise wrote a couple of months back, “it would be ironic after years of low rates and financial repression in the aftermath of the GFC if we ended up back right where we started – with a housing bubble.”
Awesome article.
When I read about the burgeoning suburbs, and hollowed-out urban cores, and so on and etc., here, and on other outlets, I’m reminded of what the experience was like for ex-urban and suburban living in the decades post WWII. Many books and dissertations have been crafted about how, well, how, hollow the suburbs are, alienating, and so on. The tally on ex-urb and suburban living in America contains a checkered tally of negatives and positives.
If suburbs do continue their explosion, there will be additional, knock-on effects. Two, perhaps, are wages and urban-center rents.
An effect we haven’t seen yet is what happens when 80% (just spitballing) who can work from home do. Employers may very well lower the wage level. If we do somehow get into a period of inflationary pressures (maybe, maybe not), forget regaining that purchasing power after taking the pay cut. Worker income, this time for the professional class, fails to grow.
We haven’t heard much about how many real estate bankruptcies there will be for space in the urban cores. We may start seeing more of these in Q1. Let’s say bankruptcy re-org lowers obligations. Let’s say rents crater. We know what follows on…lower start-up costs (if you can find the capital), re-discovery by hipsters, and an opportunity for the young in small towns, towns they consider dreary and dead, who can now afford a 700 sq ft apartment in the city.
There are also the difficult to measure reasons for why urban centers have been so successful for so long (barring the highway building period and “reclamation” project post WWII). Good luck finding a mate while in line at at the McDonalds drive through. Good luck landing that cool machine learning job while in the same drive-thru line.
The generational hollowing out of the urban centers is too early to call. Let’s see where the trends and data go. Let’s check back on the death of the city when this plague is behind us.
I have lived in NYC on and off since the early 80s. It has experienced at least 3 downturns since then. Post crash of 1987, post 9/11, and now pandemic of 2020. It will be several years before it bounces back. But it will- once there is a reasonable treatment and vaccine for covid- that is probably 2021-22, you will see the post graduates come back. It has too much to offer for singles both young and old. Lets face it you are not going to a Yankee game or the NY Philharmonic or a cool bar or restaurant in most suburban NY areas. And you don’t have to drive everywhere. Things will be bleak for a few years- but the cure will be relative costs in the suburbs vs NYC and relative benefits. Right now the suburbs have the edge- but pretty soon the bloom will go off the rose re. WFH and being isolated at home. These preferences wax and wane- you will see it in 5 years or less.
I don’t see a future where most professionals work from home. The only reason it sort of works now is because the necessary human relationships were established in person before the virus. I remember back in the 90’s when we tried to cut travel costs and do videoconferencing. The tech standards weren’t what they are today, but it was nearly impossible to get something done when you’d never met in person those on the other end. I found it very helpful to break bread with someone I was going to work with as a colleague or supplier. Humans are programmed to develop relationships in person. Companies may keep some flexible work-from-home relationships, but they will bring lots of people back into the office when it’s safe to do so.