The Great Migration to the Suburbs
July 2020 (click here to download)
Covid-19 created a challenging working environment for families living in urban areas over the last several months. In a city such as Chicago, many people are living in a two- to three-bedroom condo with both parents, trying to work full-time while providing childcare. After three or four months of living like this, most people have expressed a desire for more space and are re-evaluating their decision to live in such a densely populated area.
It seems many families are coming to that same conclusion, as mortgage applications have spiked back to pre-Covid-19 levels, and interest rates for fixed-rate mortgages are nearing all-time lows (Exhibit 1) whilst housing demand appears to be strengthening.
In a recent investment research note, Jefferies Financial Group highlighted that the average single-family home tends to be roughly two times the size of a multi-family home with two more bedrooms and one more bathroom. This has a multiplier effect for building products with the average family home having two-three times the amount of insulation, ~two times the wallboard, ~two times the kitchen cabinets, ~39% more plumbing fixtures, ~92% more gallons of paint, ~two times the amount of doors and three times the amount of windows. If this apparent increase in demand for housing translates into demand for more space and accelerates migration to the suburbs, it would be a positive tailwind for building products’ companies.
Despite the increase in mortgage applications, there are some causes for concern. Initial unemployment claims have spiked to multi-decade highs, and this is likely to have a negative impact on the frequency with which lenders approve mortgage applications (Exhibit 2). This is an obvious risk to increased housing demand. Housing affordability is also a potential issue. The National Associations of Realtors Affordability Index measures whether a typical family could qualify for a mortgage loan on a typical home, and, as shown in Exhibit 2, this Index remains at average levels which would indicate a healthy market. However, rising unemployment will be a negative impact. It will take some time to see how these offsetting factors will play out.
The view of the Manager is that Covid-19 will cause an acceleration in demand for single-family homes in the suburbs relative to urban residences and this is a positive tailwind for building product materials’ demand. The Manager continues to look for growth opportunities in the building products’ space for its investment strategies while cautiously watching for the potential negative impact of rising unemployment claims.
Source: Ben Olien of Driehaus Capital Management LLC.
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