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Chris Vermeulen

The US residential real estate market is on fire. Demand is surging as everyone is stuck at home, using their house as a gym or an office and of course a place to live. A recent Harris Poll showed that nearly 40% of urbanites were considering leaving the city to find a less crowded place to live, that featured a house. New and existing home sales are hitting multi-year highs and this trend will continue as interest rates are expected to remain near historic lows. The combination of ultra-low inventories as well as rising demand has buoyed the IYR real estate ETF along with other home building stocks. This momentum is poised to continue. Here are 7-reasons why the housing boom will accelerate in 2021.

1)  COVID-19 is Driving Up the Divorce Rate

The spread of COVID-19 is not going away. Nearly everyone is stuck at home with each other which is increasing separations and divorces at a higher than normal rate. For the period between March and June 2020, the number of people in the U.S. looking for divorces increased by a robust 34% year over year according to Legal Templates. The driving force, the lockdown during the spread of COVID. To me, this means that more people will be looking to find a new home especially if kids are involved.

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2) People are Leaving the Cities

People are fleeing cities at record rates. The pandemic is driving people to less populated areas, away from apartment dwelling, and toward houses. The New York Times reported that from March through August the number of people moving out of large cities was up 50% year over year. HireAHelper, an online marketplace, found that the spread of COVID has generated an abnormally large increase in the people moving out of large cities like New York, Los Angeles, and San Francisco and into smaller cities like Scottsdale Arizona, Durham North Carolina, and Columbus Ohio. This trend is perpetuating and I believe it will continue through 2021.

3) The Trend in New Home Sales is Rising

It’s easy to say that since divorces are up and people are leaving cities that new home sales should rise but it is another to prove it. The proof is always in the pudding. In August, sales of new U.S. single-family homes surged to their highest level in nearly 14 years according to the U.S. Commerce Department. New home sales rose 4.8% to an annual rate of 1.011 million units which was the highest level since September 2006. Since new home sales are counted at the signing of a contract, I consider these metrics a leading indicator of home sales.

4) Existing Home Sales are Accelerating

New home sales make up about 15% of the total home sales in the US compared to existing home sales which make up the bulk of home sales. In August, existing-home sales rose by 2.4% month over month to an annual rate of 6 million units the highest level since December 2006. Sales surged nearly 11% year over year. The accelerating rate of sales has spilled over into prices. The Commerce Department reports that the median existing house price jumped 11.4% year over year to a record $310,600 in August.

5) Inventories Remain Very Low

Homebuilders are salivating at the prospect of lower trending inventories. There were nearly 1.5-million homes on the market in August, down 18.6% from a year ago. At this rate, it will only take 3-months to clear out all the current existing home inventory down from 4-months a year ago. Historically, a 7-month supply of homes is viewed as a healthy equilibrium. Homes are flying off the market. In August the average home was on the market for 22-days, compared to 31-days a year ago, according to the National Association of Realtors. Nearly 70% of the homes on the market sold in less than 1-month.

6) Interest Rates are at Historic Lows

While the tightness in the housing market could generate some demand destruction attractive borrowing rates have more than offset the higher prices. In September, the 30-year fixed mortgage rate hovered near 2.87%, according to Freddie Mac. These rates will likely remain stable as the Federal Reserve has signaled to market participants that short-term interest rates will remain near zero, for the next 3-years.

*Source Y-charts

7) The Technicals are Positive But Be Prepared Either Way

The IYR real estate ETF is consolidating sideways. When the price of an ETF moves sideways for several months it means it is building up a lot of energy for the next move. The recent movements have created a tighter range as the ETF is sandwiched between resistance near the 10-week moving average and support near the 50-week moving average. Any breakout here will generate a robust move higher, potentially testing the 2020 highs near $101. Strong resistance is seen near the August 2016 highs which coincide with the June 2020 highs near $87.

Short-term momentum is positive as the fast stochastic recently generated a crossover buy signal. Medium-term momentum is decelerating as the MACD (moving average convergence divergence) histogram is printing in positive territory with a flattening trajectory which points to consolidation.

The Bottom Line

The upshot is that the spread of COVID has brought on a cascade of events that point to a continued acceleration in the housing market. People are moving out of large cities and looking for homes in the suburbs and smaller cities. The divorce rate has accelerated which means that more people will be competing for available homes. Both new and existing home sales have reached 14-year highs, and the low level of interest rates will continue to propel demand. With inventories as multi-decade lows, home builders will continue to benefit from higher demand and low supplies. The technicals show the IYR ETF is moving sideways gathering energy and poised to break out to higher levels.

As a technical analyst and trader since 1997, I have been through a few bull/bear market cycles in stocks and commodities. I believe I have a good pulse on the market and timing key turning points for investing and short-term swing traders.

Chris Vermeulen
Chief Market Strategist

NOTICE AND DISCLAIMER: Our free research does not constitute a trade recommendation or solicitation for our readers to take any action regarding this research.  It is provided for educational purposes only to our subscribers and not intended to be acted upon.

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