Please ensure Javascript is enabled for purposes of website accessibility

Why These Residential Real Estate Stocks Soared More Than 18% in July

By John Bromels – Aug 8, 2020 at 5:13PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Pent-up demand burst into the market in June.

What happened

Residential real estate stocks soared in July, according to data provided by S&P Global Market Intelligence. These included homebuilders D.R. Horton (DHI 1.23%) and NVR (NVR 1.67%), shares of which rose 19.3% and 20.6%, respectively, and online realtor Zillow Group's A shares (ZG 1.96%) and nonvoting C shares (Z 1.74%), up 18.5% and 18.7%, respectively.

All three companies handily outperformed the S&P 500, shares of which rose just 5.5% during the month. 

A home with a "For Sale" sign in the front yard.

Image source: Getty Images.

So what

The coronavirus pandemic and its related shutdowns caused big headaches for the residential real estate industry this year. Home sales were strong throughout the mild winter, seeing a shallower-than-usual dip in activity in January and February.

In March, though, the stock market crash prompted many potential buyers to rethink their plans. The spread of the coronavirus throughout the U.S. in late March caused sellers to pull their homes off the market for fear of catching the virus through home showings. Then, in April and May, with more than 90% of the U.S. population -- and all the top U.S. housing markets -- under stay-at-home or similar orders, sales slowed to a crawl during the usually busy spring homebuying season. 

In the spring, with unemployment soaring, it wasn't clear whether demand would come back once stay-at-home orders were lifted. On the one hand, the Federal Reserve had cut interest rates to near zero, and mortgage rates plunged to record lows, which caused a spike in mortgage applications. On the other hand, many of those applicants were being rejected as banks tightened their lending standards. Unemployment remained high, which analysts worried could cause a lack of demand.

It turns out, they needn't have worried. When states reopened in June, the housing market exploded. Pent-up demand from the spring, coupled with the stock market's recovery, translated to a record 20.7% month-over-month jump in existing home sales from May to June, according to data released by the National Association of Realtors (NAR). In some areas, the jump was even stronger: San Francisco Bay area sales, for example, soared 70% from May to June, according to the California Association of Realtors. Meanwhile, the NAR said the median home price rose by 3.5%.

As if those numbers weren't good enough, new-home sales saw an even bigger jump in June, up 55% from May, according to a monthly survey by John Burns Real Estate Consulting. Even though sales of existing homes were down from June 2019, new home sales hit their highest level in 13 years.

These phenomenal numbers, which began to be reported in mid-July, cheered investors, who bid up housing stocks. 

Now what

Despite the surge in sales, available housing inventory ticked up only 1.3% from May to June. Although an inventory shortage has been ongoing since 2019, June's inventory was 18.2% lower than in June 2019. That presents an opportunity for homebuilders like NVR and D.R. Horton, which can help increase housing inventory by building new homes. By building to order, they may also attract buyers who are having trouble finding a suitable home amid the diminished existing home inventory in their area. 

Zillow also stands to benefit as the housing market heats up. That's not just because it is now getting into the business of buying and selling homes, but because buyers who may still be nervous about touring a stranger's home during the coronavirus pandemic may turn to Zillow to take a virtual tour of a home in which they are interested. Zillow's app can also offer notifications when new inventory comes online, which can help buyers get an edge in a tight housing market.

Fewer homes and more buyers means higher prices, which is good for residential real estate companies of all types. According to Lawrence Yun, NAR's chief economist, "Home prices rose during the lockdown and could rise even further due to heavy buyer competition and a significant shortage of supply."

However, just because demand exploded in June doesn't mean it will continue: June's numbers were a result of three months' worth of demand rolled into one month of sales. If coronavirus cases continue to climb, or if the economy suffers another hit, the market could dry up again. Still, D.R. Horton, NVR, and Zillow Group are worth looking into for investors who think housing demand will continue to outstrip supply. 

John Bromels has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NVR, Zillow Group (A shares), and Zillow Group (C shares). The Motley Fool has a disclosure policy.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.