Milton Fallout Shows How Far Housing Market Has to Rebound
We managed to get lucky here in Delray Beach, Florida, in regard to hurricane Milton. Luckily for us, the storm moved north, and our area was barely impacted.
The "go" bag and packed SUV seem a waste of effort and time in retrospect. However, as my late father would say, "Better to have it and not need it and need it and not have it." Our thoughts and prayers go out to our fellow Floridians on the West Coast of the state that were not so lucky, as well as the Florida Power & Light workers and others who are working with purpose and diligence to get life back to normal in the more impacted areas of the state.
In addition to the tragic human loss, Hurricanes Helene and Milton will result in another spike up in property insurance across the Southeast. This will be another nail in the coffin of what appears to be a deflating property bubble down here in the Sunshine State. Florida has already seen a substantial rise in property taxes and other carrying costs, such as monthly HOA dues and property taxes in recent years. This has made housing in Florida even more unaffordable than it is in the rest of the nation, which is also struggling with overall housing affordability being near historical lows.
In addition, new rules instituted after the Surfside condo collapse in 2021 have resulted in huge assessments in buildings over 30 years old to bring those complexes up to code across the state. Inn Miami Dade County alone, the number of condos being listed for sale has more than doubled over the past year.
I wrote extensively about the acceleration of the migration down to Florida during the pandemic years of 2020 and 2021. I highlighted and recommended names like The St. Joe Company (JOE) , which owns extensive acreage above Tampa in the northwest portion of Florida, back when that stock was trading in the low $20s. That was a good call, as the stock has nearly tripled since then. However, that and other similar concerns are more than played out at this point.
Home builders and housing-related stocks got a nice bounce from the anticipation and implementation of the first cut to the federal funds rate since 2020 in September. However, a 50 BPS interest rate cut is not going to be a panacea to what ails the housing market. Tens of millions of homebuilders have 3% and 4% mortgage rates on their existing abodes. Mortgage rates moving down from 7.5% to 8% to 6% to 7% will only help on the margin in that regard. This is why existing home sales for both 2023 and 2024 are going to come in at their lowest levels since 1995.
I noted in my column on Wednesday how overvalued housing related concern Sherwin Williams (SHW) has become, selling at north of 30-times forward earnings, despite producing revenue growth lower than the rate of inflation. Major homebuilders like Lennar (LEN) , which is headquartered in Miami, appear very vulnerable to profit taking. This huge home builder’s stock is selling at its highest price-to-sales ratio in a decade. The equity’s price-to-book value ratio since the summer of 2022 has doubled and stands at record highs as well.
The entire home building and housing-related sectors seem significantly overvalued in my opinion. Especially with mortgage rates already backing up again along with the yield on the 10-year treasury on recent fears that inflation made not be as conquered as the Federal Reserve believes it to be. Much like the west coast of Florida, the housing market is going to need time to rebound. One or two cuts in the fed funds rate is not going to move the needle as significantly as these stocks are counting on based on their current trading levels.
At the time of publication, Jensen had no positions in any securities mentioned.