Housing: Horror or Hope?

In this issue of the Peel:

• Rising mortgage rates are squeezing buyers. A chronic underbuilding has led to a housing shortage, keeping home prices high despite increased inventory and volatility in rates.
• Lyft soared due to solid earnings and a typo by its CFO, while Robinhood posted a surprise profit. Kraft Heinz and Sony experienced declines due to missed sales targets and a cut in PS5 sales forecast, respectively.
• An increased risk appetite and higher growth projections—recession is no longer the baseline prediction among fund managers.

Market Snapshot ??

Banana Bits ??

• Nvidia is now the 3rd most valuable company in the US
• And largely because of that, investors are all in on tech again
• Layoffs are coming at Cisco, leading to a fall in earnings
• Need investment advice? Stay award from Harvard - ask Baylor

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Macro Monkey Says ??

The Hows of Housing

Back in the day, you could slap a few bedrooms and bathrooms together and call it a “house.”

Nowadays, with dogs requiring their own bedrooms and everyone wanting a place as nice as Drake & Josh’s, our standards for a “house” have gone up quite a bit.

So, maybe it makes sense that getting out of Mom and Dad’s basement is a lot harder these days? Maybe…but it probably shouldn’t be this hard.

Checking The Pulse

Yesterday, we got the latest update on mortgage rates here in America the Beautiful, and to no surprise, buyers are getting squeezed once again.

Source

Standard 30-year fixed mortgage rates increased from 6.80% to 6.87%, per the latest weekly data from the Mortgage Bankers Association. We’re certainly not back to the disgusting, nausea-inducing 8% level, but we’re still moving in the wrong direction.

Buyers are pulling back as a result. And diving deeper into the most important asset class for the vast majority of Americans, we can start to see why.

First and foremost, housing supply remains the key driver. Chronic underbuilding over the last decade has created a shortage so extreme that home prices could barely fall even despite massive interest rate hikes.

Source

So far, high home prices have been sticky, causing builders to finally start doing their job again.

But, although the increase in inventory and volatility among rates have started to unthaw the frozen housing market, sales levels are still far below the historical norm.

The factor that nobody seems to be considering, however, is that today’s buyers need more than the shack down the street from you that’s been listed since the Obama administration.

The percentage of homes in the total housing inventory considered “new construction” is close to reaching record highs. So, even with more and more existing homes coming on the market, it’s clear demand is focused on new homes.

Needless to say, a strong preference for new homes among buyers will 1) extend the time it takes to get housing supply on par with demand and 2) lead to an increase in the average price tag of home sales, as new homes (obviously) drive a premium.

Source

And that could partially explain why we’ve started to see yet another rise in home prices over the past 9-months despite the fact that rates have continued to increase in that time.

If you’re confused - don’t worry; so am I, and so is everyone else (even Bill McBride, who’s our top chart dealer of the day).

It’s not supposed to be like this. Like bonds, rates and home prices should move in opposite directions. But, thanks to the balance of 1) extreme demand, 2) supply shortages, 3) more new homes, and 4) higher rates, the markets have been more frozen than Mitch McConnell.

The Takeaway?

In addition to all this macro data, Zillow Group came out on Tuesday with its latest quarterly earnings report.

To no surprise, revenue is still on the decline. The only segment that saw sequential growth for the full year was the firm’s rental category. However, mortgage origination volume did more than double compared to 2022.

This was a combination of increased mortgage applications and expanded offers from Zillow, mostly attributable to the latter.

And very much to our liking, Zillow did beat on both revenue and earnings expectations for the quarter and year, leading to yesterday’s 7.63% jump.

That’s great for the WSO Alpha portfolio, along with our recently published $75.00/sh price target assigned to the firm, but based on market dynamics, it’s clearly going to take a while to reach that level through strong fundamentals.

Don’t get me wrong. We’ll take the dub while we can, but it’s just one quarter.

At least homebuyers aren’t alone in waiting for things to turn around in the housing market. We’re right there with you. We’re in this together.

And we promise it won’t be any fun at all.

What's Ripe ??

Lyft Inc (LYFT) ??35.1%

• Lyft might not be able to pick me up at the airport, but they can definitely pick up my spirits. It’s good to know even the best of us make mistakes.
• In case you missed it, Lyft’s CFO gave the firm the world’s most profitable typo, saying margins would expand 500bps…when he meant *50bps.
• Hysterical, but earnings were still solid otherwise. Net losses narrowed to just $0.09/sh on surprisingly high revenue of $1.22bn.
• The firm’s turnaround plan is going well, with guidance for gross bookings beating for Q1 as well. It’s not the OG >60%, but I’m sure they’ll take +35.1% pop.

Robinhood (HOOD) ??13.0%

• Stealing from the rich to give to the poor is pretty sick, but the company named after the age-old fairy tale does the opposite. At least it’s going well.
• The scumbags at Robinhood delivered a surprise $0.03/sh profit in Q4 on $471mn in revenue, both above estimates and solid growth from 2022.
• Users are growing, too, so retail investing is confirmed BACK. Options trading revenue fell 2%, but the degeneracy remained, with digital asset trading up 10%.

What's Rotten ??

Kraft Heinz (KHC) ??5.5%

• Mac & cheese and ketchup is officially not the move anymore after seeing Kraft’s latest quarterly numbers. Sales missed estimates while profits fell 8.2%.
• Analysts were looking for $7bn in sales but got only $6.86bn. Executives blamed shifts in consumer preferences, still citing inflation like it’s 2022 or something.
• Sales in the US were 2% lower than last year, but international sales grew healthily. Sadly, there’s nothing else about this company a doctor would call “healthy.”

Expedia (EXPE) ??4.3%

• Hold up, are we touching grass now? Nobody told me…But with Sony’s cut to its PS5 sales forecast, we can’t help but assume people are actually going outside.
• Prior forecasts expected 25mn units moved this quarter, now cut to 21mn. And that killed the vibe despite record revenue of $24.9bn in Q4.
• Profits beat as well, but Sony surprised analysts with plans to spin off 80% of their financial services unit via a public listing. Dividends in kind are incoming.

Thought Banana ??

“It’s Provocative, It Gets The People Goin’”

The apes are fired up and we couldn’t be more here for it.

From risk appetite to recession odds, we’re starting to see the market and macro vibe move back in the right direction. Let’s see what’s going on.

Recession Odds

According to the Fund Manager Survey (FMS) from Bank of America, this is the first month since April 2022 that a recession is not the baseline prediction.

Source

After a year of strong economic data and normalization of the “higher for longer” interest rate environment, investors finally appear to have come around to the idea that we’re not totally f*cked.

In fact, these fund managers went even further. Global growth projections over the next year also reached their highest level since February 2022.

Source

Obviously, the opinions of fund managers don’t really mean much. If there’s one thing investors are really good at, it’s being wrong. But at the very least, another survey released Tuesday shows us they’re at least putting their money where their mouth is.

The S&P Global Investment Manager Index shows risk appetite levels not seen since late 2021. Earnings estimates moved higher, tech sentiment improved, and the market upturn since late 2023 has brought higher valuation multiples along with it.

So, not only are fund managers saying recession odds are lower, but they’re investing like it, too.

Source

We love to see it—as long as they’re right, of course.

The Takeaway?

The wall of worry has been climbed, and investors woke up far more bright-eyed and bushy-tailed in 2024.

But with a March FOMC meeting that’s arguably the most anticipated one since March 2022 (when rates began to rise), that could all change very quickly. No one in their right mind expects a rate hike, but the odds of a cut have been moving lower.

And, from a fundamental perspective, no rate cut should be a good thing for markets. The lack of a rate cut signals that the Fed thinks the economy is strong enough to support rates at their current level. Needing to cut is where worry creeps in.

So, for now, investors are fired up, and recent data has finally gotten the people goin’. As always, the question that remains is, “How long can this last?”

Big Question: Are fund managers getting excited at exactly the wrong time? Will we look back a year from now and laugh at these survey results? How risk on are you feeling?

Banana Brain Teaser ??

Yesterday ??

Andrew started saving at the beginning of the year and had saved $240 by the end of the year. He continued to save and by the end of 2 years had saved a total of 540. What is the approximate percentage increase in the amount Andrew saved during the second year compared to the amount he saved during the first year?

Answer: 25%

Today ??

In a numerical table with 10 rows and 10 columns, each entry is either a 9 or a 10. If the number of 9s in the nth row is n-1 for each n from 1 to 10, what is the average (arithmetic mean) of all the numbers in the table?

Send your guesses to [email protected]

Wise Investor Says ??

“Bull markets climb a wall of worry; bear markets slide down a river of hope.” — Wall Street proverb

How Would You Rate Today's Peel??

??All the bananas? ? ? ? ? ? ? ? ? ? ? ? ???Meh? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ??Rotten AF

Happy Investing,

David, Vyom, Jasper & Patrick