Will Tightening Labor Market Push Housing Stocks Higher?

With so much media attention focused on global economic events, it is easy to overlook a burgeoning investment opportunity that is occurring in your own backyard – literally. A “perfect storm” of macro-economic factors are converging to drive up home values, and the stock prices of companies that benefit from increased demand for residential housing. Unlike last year when an unusually wet and cold spring brought out relatively few buyers, this year many regions of the country are witnessing brisk sales activity.

An imbalance in supply and demand of housing is beginning to show up in the national sales figures. According to Realtor.com, April of 2015 witnessed a 17.2% decline in total listings across the country compared to the same month in 2014, while the median list price was up 8.2%. The average home was on the market an average of 73 days in April, down 12.1% from the previous year. Simply put, there are not enough houses for sale to keep up with demand so their prices are going up, and they are being snapped up quicker by purchasers afraid of losing out.

The tightening labor market is another factor working in favor of higher home prices. Initial jobless claims have fallen for eleven consecutive weeks, with its average over the past four weeks at its lowest level since April of 2000. Despite layoffs in the energy sector due to low oil prices, total unemployment claims are dropping as most other sectors are gaining strength and expanding their workforces to ramp up production. Combined with the “wealth effect” from lower gasoline prices, an increasing number of consumers are feeling emboldened to commit to a mortgage and stop paying rent.

A reversal in interest rates is the third factor driving up home sales. Mortgage rates appear to have bottomed out and are beginning to rise; motivating prospective home buyers into acting sooner rather than later. The yield on the 10-year Treasury note – generally regarded as a proxy for the direction of mortgage rates – bottomed out below 1.7% in late January but has recently crested above 2.2%.  Buyers no longer feel confident that very low mortgage rates will still be available next year, and are locking in long term rates now before it is too late.

The list of potential beneficiaries from a bump in demand for housing extends far beyond the obvious candidates. In addition to homebuilders, materials manufactures and home improvement stores, many retailers should also benefit as homeowners purchase goods to furnish their new homes.

For example, Last month I added Best Buy (BBY) to the Personal Finance Growth Portfolio as a potential housing boom beneficiary. Last Wednesday evening the company announced better than expected quarterly earnings due in part to an unexpected bump in sales of home appliances such as refrigerators and washer/dryers, which resulted in a 10% jump in its share price the following morning.

Many banks should also benefit, especially if interest rates rise enough for them to earn a bigger spread than could be had during the days of the Fed’s ZIRP (zero interest rate policy) initiative. Certain regional banks located where job growth is strongest could perform particularly well. According to a March 2015 survey by the Bureau of Labor Statistics, the states with the largest percentage change in jobs were Oklahoma (+1.09%), Tennessee (+1.06%) and Mississippi (+1.0%). In case you’re wondering which states to avoid, the ones which lost the most jobs were West Virginia (-0.51%), Florida (-0.33%) and North Dakota (-0.27%).

A less obvious beneficiary from rising home prices may be municipal bonds issues backed by property taxes. A large increase in real estate values should equate to a spike in property taxes next year, which in turn may result in certain bonds being upgraded as their coverage ratios improve. The biggest winners could be bonds currently rated one level below investment-grade, as that precludes them from consideration by most bond funds. Being bumped up to investment-grade status would immediately open up billions of dollars of potential investment capital that is currently unavailable to them.

However you decide to play it, there is money to be made by the current rush for home ownership. It may only turn out to be a temporary spike caused by the factors described above, or it may portend a longer term shift into hard assets precipitated by the expectation or rising inflation. Either way, this is an excellent opportunity to invest in your own back yard until the global economy finds firmer footing.