Investors withdrew billions of dollars out of U.S. investment-grade corporate bonds and related exchange-traded funds over the past week as the Federal Reserve’s aggressive rate hikes plans feed fears of an economic downturn.
U.S. high-grade funds and ETFs saw the biggest weekly outflows of $8.9 billion in the week ended on June 22 from a $6.56 billion outflow a week earlier (see chart), according to a BofA Global, in a weekly report.
SOURCE: BOFA GLOBAL RESEARCH, FINRA, TRACE, FEDERAL RESERVE
Read More: Corporate America’s debt sinks to lowest prices since 2008. What comes next hinges on inflation
“This weekly outflows was the biggest this year, exceeding the previous record $8.07 billion outflow during the week of May 11,” a team at BofA Global Research wrote on Thursday. “The outflows were largely driven by ex. short-term HG (to $7.12bn from $5.49bn), while outflows from short-term HG remained more moderate (to $1.79bn from $1.06bn).”
Investors in U.S. corporate debt market have hit by the sector’s sharply negative performance this year, including after high inflation data prompted the Federal Reserve’s decision to raise its policy rate by 75 basis points, the largest move since 1994.
The biggest ETFs for U.S. corporate bonds were headed for weekly gains, but sharp yearly losses. The iShares iBoxx $ Investment Grade Corporate Bond ETF
LQD,
was up 0.1% Friday, but down about 17% on the year so far, according to FactSet data.
A Federal Reserve and Securities Industry and Financial Markets Association (SIFMA) data shows that the U.S. companies now face $10 trillion outstanding debts as of the first quarter of 2022.
The 10-year Treasury yield
TMUBMUSD10Y,
climbed to 3.12% on Friday, yet it remains sharply lower after hitting a 11-year high earlier this month. Treasury yields move opposite to price.
Read more: What the Fed’s biggest rate hike in decades means for the bear market in bonds
Hi, MarketWatchers. Don’t miss these top stories.
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‘I feel bad that I’ll be taking most of his income’: I make twice what my boyfriend does. He pays me $300 in rent, but I want him to pay $800. Is that fair?
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Weekend reads: Your guide to bear markets for stocks, crypto and, soon, housing
Also, what you can do to protect yourself as interest rates rise. Read More
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My summer portfolio strategy is to play the old disco hit “Baby Come Back” while slow dancing with my December brokerage statements. If it works, I have a business idea involving Hall, Oates, and a two-and-20 fee structure.
At least there’s real estate. Home equity is said to be hitting record highs. Then again, taking comfort there would be like slipping on a financial toupee—everyone knows that underlying conditions have deteriorated.
The latest reading on nationwide pricing comes from back in March. Since then, 30-year mortgage rates have shot up to nearly 6%, and applications from buyers have slowed. This past week, a pair of online brokers with a good read on house searches,
Redfin
(ticker: RDFN) and
Compass
(COMP), announced layoffs.
Meanwhile, Redfin shares are down some 90% from their peak. Builders have gotten clobbered, too. Friends don’t let friends own leveraged exchange-traded funds with names like
Direxion Daily Homebuilders & Supplies Bull 3X Shares
(NAIL), especially when interest rates are rising, but if you’re curious, that one just lost 45% over five trading days.
Should investors buy shares of home builders here? Brokers? What’s next for house prices? And when will the stock market come back? Let me answer those in order of declining near-term confidence, starting at iffy.
Yes, buy builders. Prefer
Lennar
(LEN) and
Toll Brothers
(TOL), says Jade Rahmani, who covers the group for KBW. He points out that builder shares trade at 60% of projected book value, which is where they tend to bottom during recessions, ignoring the 2008 financial crisis. Lennar will benefit from the pending sale of a real estate technology unit, and Toll focuses on affluent buyers, around 30% of whom pay cash, and so aren’t put off by high mortgage rates.
Price/earnings ratios across the group are astonishingly low, but ignore them. They stem from two conditions that won’t repeat soon: land values jumping 30% or more from the time companies bought acres to when they sold houses, and a sharply higher pace of transactions during the pandemic. A builder that trades at four times earnings might really go for eight times assuming normalized conditions—still cheap, but a big difference.
House prices jumped more than 20% in March from a year earlier, but Rahmani expects that rate to plunge to 2% by the end of the year. His baseline view is that next year brings flat prices. His recession scenario, based on a study of past sales volumes, has prices falling 5% next year—perhaps more if mortgage rates rise to 7%. That might not sound like much, but for recent buyers with typical mortgages, a 5% price drop can reduce equity by 25%.
Most homeowners don’t have mortgage rates anywhere near recent ones; some two-thirds are locked in below 4%. These buyers are unlikely to move and take new loans if they don’t have to, which is one reason that supply could stay low for years. Another is that mortgages are much higher quality than they were during the last housing bubble, so there’s unlikely to be a wave of defaults and panic selling.
But something has to give on affordability. Typical payments on new mortgages have topped 23% of disposable income, close to their 26% high during the last bubble. But incomes are growing by 6% a year, so a long pause for house prices could help restore affordability. Anyhow, the pandemic has left people spending more time in their homes, so they should be willing to pay somewhat more on housing as a percentage of their income, reckons Rahmani.
Don’t rush to buy shares of the brokers, says William Blair analyst Stephen Sheldon. He has Market Perform ratings on three of them: Redfin,
RE/MAX Holdings
(RMAX), and
eXp World Holdings
(EXPI). In a blog post this past week, Redfin CEO Glenn Kelman wrote that May demand was 17% below expectations, and that the company will lay off 8% of employees. Redfin hires agents directly, whereas many brokers use independent contractors.
Kelman wrote that the sales slump could last years rather than months. More agents could leave on their own. National Association of Realtors membership, a proxy for the number of people selling houses, hit 1.6 million last year, up from about a million in 2012.
Sheldon at William Blair says he’s struck by how far broker valuations have come down, but sentiment is sour, and he’s waiting for signs of stabilization. Redfin goes for less than a tenth of its peak stock market value early last year, even though revenue has roughly doubled. That puts shares at around one-third of revenue. Free cash flow was expected to turn consistently positive starting in 2024. Now, we’ll see.
As for the stock market, I have good news and bad news, neither of which is reliable. The S&P 500 this past week dipped below 15 times projected earnings for next year, which suggests pricing has returned to historical averages. But there’s nothing to say that the market won’t overshoot its average valuation on its way to becoming cheap. And
Goldman Sachs
says forecasts for 10% earnings growth this year and next look too high.
Expect slower growth, says Goldman, and if there’s a recession, earnings could fall next year to below last year’s level. The bank’s estimates under that scenario leave the S&P 500 today trading at more than 18 times next year’s earnings. Goldman predicts that the index will rise 17% from Thursday’s level by year’s end without a recession, or fall 14% with one. Please accept my congratulations or condolences.
Not to worry, says Credit Suisse. Statistically, individual forecasts for company earnings are tightly clustered. That’s the opposite of what tends to happen before earnings tank.
I’ve heard people refer to the stock market as a “total cluster” before, but I had no idea they were talking about estimate dispersion.
Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.
My summer portfolio strategy is to play the old disco hit “Baby Come Back” while slow dancing with my December brokerage statements. If it works, I have a business idea involving Hall, Oates, and a two-and-20 fee structure.
At least there’s real estate. Home equity is said to be hitting record highs. Then again, taking comfort there would be like slipping on a financial toupee—everyone knows that underlying conditions have deteriorated.
The latest reading on nationwide pricing comes from back in March. Since then, 30-year mortgage rates have shot up to nearly 6%, and applications from buyers have slowed. This past week, a pair of online brokers with a good read on house searches,
Redfin
(ticker: RDFN) and
Compass
(COMP), announced layoffs.
Meanwhile, Redfin shares are down some 90% from their peak. Builders have gotten clobbered, too. Friends don’t let friends own leveraged exchange-traded funds with names like
Direxion Daily Homebuilders & Supplies Bull 3X Shares
(NAIL), especially when interest rates are rising, but if you’re curious, that one just lost 45% over five trading days.
Should investors buy shares of home builders here? Brokers? What’s next for house prices? And when will the stock market come back? Let me answer those in order of declining near-term confidence, starting at iffy.
Yes, buy builders. Prefer
Lennar
(LEN) and
Toll Brothers
(TOL), says Jade Rahmani, who covers the group for KBW. He points out that builder shares trade at 60% of projected book value, which is where they tend to bottom during recessions, ignoring the 2008 financial crisis. Lennar will benefit from the pending sale of a real estate technology unit, and Toll focuses on affluent buyers, around 30% of whom pay cash, and so aren’t put off by high mortgage rates.
Price/earnings ratios across the group are astonishingly low, but ignore them. They stem from two conditions that won’t repeat soon: land values jumping 30% or more from the time companies bought acres to when they sold houses, and a sharply higher pace of transactions during the pandemic. A builder that trades at four times earnings might really go for eight times assuming normalized conditions—still cheap, but a big difference.
House prices jumped more than 20% in March from a year earlier, but Rahmani expects that rate to plunge to 2% by the end of the year. His baseline view is that next year brings flat prices. His recession scenario, based on a study of past sales volumes, has prices falling 5% next year—perhaps more if mortgage rates rise to 7%. That might not sound like much, but for recent buyers with typical mortgages, a 5% price drop can reduce equity by 25%.
Most homeowners don’t have mortgage rates anywhere near recent ones; some two-thirds are locked in below 4%. These buyers are unlikely to move and take new loans if they don’t have to, which is one reason that supply could stay low for years. Another is that mortgages are much higher quality than they were during the last housing bubble, so there’s unlikely to be a wave of defaults and panic selling.
But something has to give on affordability. Typical payments on new mortgages have topped 23% of disposable income, close to their 26% high during the last bubble. But incomes are growing by 6% a year, so a long pause for house prices could help restore affordability. Anyhow, the pandemic has left people spending more time in their homes, so they should be willing to pay somewhat more on housing as a percentage of their income, reckons Rahmani.
Don’t rush to buy shares of the brokers, says William Blair analyst Stephen Sheldon. He has Market Perform ratings on three of them: Redfin,
RE/MAX Holdings
(RMAX), and
eXp World Holdings
(EXPI). In a blog post this past week, Redfin CEO Glenn Kelman wrote that May demand was 17% below expectations, and that the company will lay off 8% of employees. Redfin hires agents directly, whereas many brokers use independent contractors.
Kelman wrote that the sales slump could last years rather than months. More agents could leave on their own. National Association of Realtors membership, a proxy for the number of people selling houses, hit 1.6 million last year, up from about a million in 2012.
Sheldon at William Blair says he’s struck by how far broker valuations have come down, but sentiment is sour, and he’s waiting for signs of stabilization. Redfin goes for less than a tenth of its peak stock market value early last year, even though revenue has roughly doubled. That puts shares at around one-third of revenue. Free cash flow was expected to turn consistently positive starting in 2024. Now, we’ll see.
As for the stock market, I have good news and bad news, neither of which is reliable. The S&P 500 this past week dipped below 15 times projected earnings for next year, which suggests pricing has returned to historical averages. But there’s nothing to say that the market won’t overshoot its average valuation on its way to becoming cheap. And
Goldman Sachs
says forecasts for 10% earnings growth this year and next look too high.
Expect slower growth, says Goldman, and if there’s a recession, earnings could fall next year to below last year’s level. The bank’s estimates under that scenario leave the S&P 500 today trading at more than 18 times next year’s earnings. Goldman predicts that the index will rise 17% from Thursday’s level by year’s end without a recession, or fall 14% with one. Please accept my congratulations or condolences.
Not to worry, says Credit Suisse. Statistically, individual forecasts for company earnings are tightly clustered. That’s the opposite of what tends to happen before earnings tank.
I’ve heard people refer to the stock market as a “total cluster” before, but I had no idea they were talking about estimate dispersion.
Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.
Rising interest rates could pinch freight carriers and put industrial real-estate transactions on pause, executives say, but tighter policy might help if it succeeds in slowing the inflation that is driving up the cost of projects.
“If there’s any one sector that really needs inflation to get under better control, it is the industrial sector,” said
Kevin Thorpe,
chief economist at real-estate services firm
The Federal Reserve on Wednesday announced it would raise interest rates by 0.75 percentage point and Fed Chairman
Jerome Powell
said the central bank could follow the largest interest rate increase since 1994 with more rapid hikes this year.
Daniel Son,
head of global banking at U.S. Bank, oversees its supply-chain finance business. He said the rising financing costs will also raise inventory carrying costs, adding to stresses in supply chains—if companies carry less inventory to tamp down costs.
“When interest rates go up, then there’s a correlation that inventories actually go down” when companies can’t pass along those higher costs to their customers, he said.
Inventory costs were already elevated as retailers and manufacturers sought to bring in goods to refill depleted stocks as supply-chain logjams tied up orders on the water and at congested ports. The Logistics Managers’ Index, a monthly survey of supply-chain managers, showed inventory costs about 33% higher in May than they were in the same month in 2020.
The higher rates will also raise borrowing costs for logistics operators and carriers and could lead some industrial real-estate investors to put off decisions on new construction, executives said.
The increased cost of money could have a big impact on lightly-capitalized trucking companies that operate on thin margins, said
Jeff Carlson,
vice president of global sales and marketing at freight-payment company
“You could actually end up with a reduction on available trucks down the road if you start to lose a lot of carriers,” Mr. Carlson said.
The tighter money policy comes as freight carriers are already wrestling with higher fuel prices, adding costs that smaller operators have trouble passing along to customers.
Gregg Healy,
executive vice president and head of the industrial services group in North America at real-estate service provider
PLC, said higher financing costs could also cool investor interest in what recently has been a red-hot market for industrial real estate.
Mr. Healy, who is based in Southern California, said he is not seeing warehouses change hands in some parts of the region even as overall distribution space remains tight.
“There’s a pause because you have investment groups which are looking at their own debt stack, and they’re saying, ‘OK, what are opportunities for reward here? What’s the risk that might be out there as well going forward?’” Mr. Healy said.
The rate hike will also affect calculations on real-estate projects, said
Ken Simonson,
chief economist at the Associated General Contractors of America, a trade group representing builders. Higher borrowing costs mean some projects such as warehouses will “no longer pencil out,” Mr. Simonson said. Financing costs “along with rapidly rising construction materials and labor costs will outrun the potential rental income,” he added.
But the fallout on infrastructure projects such as highway construction will be generally minor, he said, since much of their financial backing comes from state and federal funding.
“Many types of construction are relatively insensitive to this increase: infrastructure and long-lived manufacturing and power projects, for instance,” Mr. Simonson said.
Write to Liz Young at liz.young@wsj.com
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
There’s been a property in our family going back decades. It was actually split into four equal parts among the original owners, who have now all passed away. So the kids of the owners have the rights to the property. They each have 25%.
My grandma and her son (my uncle) were living there rent-free for decades until my grandma passed away a couple years ago, and now the other family members want their part of whatever the value of the home is.
My side of the family has six siblings. They had a meeting as to what to do with the property. Two options: 1. Sell the property and split the proceeds. 2. They pool their money together and buy the property from the rest of the family.
The only problem: Not one sibling wanted to pony up the money to purchase the property. One of these siblings — my uncle — still lives at the property, lives off Social Security (about $800 a month), and really has no desire to have any type of job for an income.
“‘If they sold the property, my uncle would have nowhere to live without money to support himself. And he would be extremely unhappy with some type of small apartment.’”
If they sold the property, my uncle would have nowhere to live without money to support himself. And he would be extremely unhappy with some type of small apartment. In essence, my dad was the only one with financial means to purchase the property to keep it in the family.
My dad has put more than $100,000 into it so far. Once he purchases the property, he will own it outright. So he’s going through all this trouble of contacting long-lost family members to get their signatures for his purchase of the property in exchange for the money due to them from the property.
Here’s the biggest problem: My dad’s other brother sometimes sleeps at the property, but he mostly uses it to store items from his junk-removal business. So the property is pretty trashed. Apparently he doesn’t make much profit from the junk-removal business, so it would be difficult for him to pay my dad any kind of rent.
He’s borrowed lots of money from my dad and other family members throughout the years. My dad’s patience with him is wearing thin, and he wants his brother to get a real job, as opposed to trying to run a business while trashing the property.
My dad just wants the property clean, so he can eventually take out a loan to build a house on the land so he can resell it.
Frustrated Family Member
Dear Frustrated,
First of all, never put $100,000 of your own money into a house that (a) you don’t live in, (b) other people use for accommodation and/or storage and (c) is owned by several people, many of whom don’t have the money to buy you out. I understand that spending money on this home will help it maintain and improve its value, but that increased value will likely be split equally among the owners if and when it’s sold. Your father will have an uphill struggle to get that money back.
The problem is: Your uncle who lives there has all the reason in the world to welcome renovations and make his/their home more comfortable, but there is not much reward in giving up that home and renting a smaller apartment. He loses the security of being able to live there rent-free and being the proverbial cog in the wheel, preventing the property from being sold with the proceeds being split among his siblings. It’s a tough spot.
“Your father’s dilemma is the result of bad estate. Leaving a house to multiple siblings will stoke long-held resentments, and cast an unflattering light on the gap in their financial lives.”
If he does wish to sell the home rather than allow this to linger for years, he should do his best to contact the other owners to convey their wishes to sell or not. Given what you said about the other siblings using the property for various purposes, he is unlikely to reach a consensus. As such, he can take a partition action to force his siblings to sell their share. The court will decide if there is a strong reason to sell. This could be an expensive and bitter legal challenge.
As the Law Offices of Weiss & Weiss state in this blog post on the subject of partition: “When two or more owners cannot agree on the disposition of the property in question, any of the owners can file a partition action in the appropriate court.” And what if there is someone living in the property? “A person remaining in possession does not have the right to block the potential sale of the property simply by virtue of living at the property,” the firm says.
There may be an inquest: “Each co-owner is given the opportunity to provide evidence of their contributions to the upkeep of the property, such as payment of real estate taxes, insurance, and property repairs, and any income they may have earned from renting the property,” the firm adds. “A court-appointed referee then issues a report to the court that details what each owner should receive from the property sale, incorporating the evidence from the inquest.”
Your father’s dilemma is the result of bad estate planning by your grandparents. Leaving a house to multiple siblings will surely stoke long-held resentments, and only cast an unflattering light on the gap in each sibling’s financial lives, exacerbating any pre-existing tensions. This is where co-owners could take nefarious actions, like turning off the water and electricity, in a dastardly effort to smoke out the other co-owners.
Selling the house then or now would prevent that.
Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
The Moneyist regrets he cannot reply to questions individually.
By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
Also read:
There’s been a property in our family going back decades. It was actually split into four equal parts among the original owners, who have now all passed away. So the kids of the owners have the rights to the property. They each have 25%.
My grandma and her son (my uncle) were living there rent-free for decades until my grandma passed away a couple years ago, and now the other family members want their part of whatever the value of the home is.
My side of the family has six siblings. They had a meeting as to what to do with the property. Two options: 1. Sell the property and split the proceeds. 2. They pool their money together and buy the property from the rest of the family.
The only problem: Not one sibling wants to pony up the money to purchase the property. One of these siblings — my uncle — still lives at the property, lives off Social Security (about $800 a month), and really has no desire to have any type of job for an income.
“‘If they sold the property, my uncle would have nowhere to live without money to support himself. And he would be extremely unhappy with some type of small apartment.’”
If they sold the property, my uncle would have nowhere to live without money to support himself. And he would be extremely unhappy with some type of small apartment. In essence, my dad was the only one with financial means to purchase the property to keep it in the family.
My dad has put more than $100,000 into it so far. Once he purchases the property, he will own it outright. So he’s going through all this trouble of contacting long-lost family members to get their signatures for his purchase of the property in exchange for the money due to them from the property.
Here’s the biggest problem: My dad’s other brother sometimes sleeps at the property, but he mostly uses it to store items from his junk-removal business. So the property is pretty trashed. Apparently he doesn’t make much profit from the junk-removal business, so it would be difficult for him to pay my dad any kind of rent.
He’s borrowed lots of money from my dad and other family members throughout the years. My dad’s patience with him is wearing thin, and he wants his brother to get a real job, as opposed to trying to run a business while trashing the property.
My dad just wants the property clean, so he can eventually take out a loan to build a house on the land so he can resell it.
Frustrated Family Member
Dear Frustrated,
First of all, never put $100,000 of your own money into a house that (a) you don’t live in, (b) other people use for accommodation and/or storage and (c) is owned by several people, many of whom don’t have the money to buy you out. I understand that spending money on this home will help it maintain and improve its value, but that increased value will likely be split equally among the owners if and when it’s sold. Your father will have an uphill struggle to get that money back.
The problem is: Your uncle who lives there has all the reason in the world to welcome renovations and make his/their home more comfortable, but there is not much reward in giving up that home and renting a smaller apartment. He loses the security of being able to live there rent-free and being the proverbial cog in the wheel, preventing the property from being sold with the proceeds being split among his siblings. It’s a tough spot.
“Your father’s dilemma is the result of bad estate. Leaving a house to multiple siblings will stoke long-held resentments, and cast an unflattering light on the gap in their financial lives.”
If he does wish to sell the home rather than allow this to linger for years, he should do his best to contact the other owners to convey their wishes to sell or not. Given what you said about the other siblings using the property for various purposes, he is unlikely to reach a consensus. As such, he can take a partition action to force his siblings to sell their share. The court will decide if there is a strong reason to sell. This could be an expensive and bitter legal challenge.
As the Law Offices of Weiss & Weiss state in this blog post on the subject of partition: “When two or more owners cannot agree on the disposition of the property in question, any of the owners can file a partition action in the appropriate court.” And what if there is someone living in the property? “A person remaining in possession does not have the right to block the potential sale of the property simply by virtue of living at the property,” the firm says.
There may be an inquest: “Each co-owner is given the opportunity to provide evidence of their contributions to the upkeep of the property, such as payment of real estate taxes, insurance, and property repairs, and any income they may have earned from renting the property,” the firm adds. “A court-appointed referee then issues a report to the court that details what each owner should receive from the property sale, incorporating the evidence from the inquest.”
Your father’s dilemma is the result of bad estate planning by your grandparents. Leaving a house to multiple siblings will surely stoke long-held resentments, and only cast an unflattering light on the gap in each sibling’s financial lives, exacerbating any pre-existing tensions. This is where co-owners could take nefarious actions, like turning off the water and electricity, in a dastardly effort to smoke out the other co-owners.
Selling the house then or now would prevent that.
Check out the Moneyist private Facebook group, where we look for answers to life’s thorniest money issues. Readers write in to me with all sorts of dilemmas. Post your questions, tell me what you want to know more about, or weigh in on the latest Moneyist columns.
The Moneyist regrets he cannot reply to questions individually.
By emailing your questions, you agree to having them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
Also read:
House prices have been ballistic over the last two years, in part due to a big shortage in housing materials. A new report lays out what elements actually go into building a home, highlighting how complicated — and expensive — the process can get.
“In the last three years, the cost to build a home in the U.S. has risen at an unprecedented rate,” wrote the authors of Bank of America’s 2022 “Who builds the house ” report, released June 8.
A key driver of higher home prices is the shortage in building materials.
“The way home builders describe the supply chain right now is whack-a-mole,” Rafe Jadrosich, an analyst at Bank of America and a co-author of the report, told MarketWatch, “where every time they find one thing that they fix, another one pops up … there’s always a new category that’s creating the bottleneck.”
Bank of America estimated the value of the raw materials in an average single-family home in America to be around $118,000 in 2021. Labor and land costs -– which can vary by region –- constitute the remaining two-thirds of the cost of a home.
Photo by Justin Sullivan/Getty Images
The bill for materials required to build an average size new single-family home increased by 42% from 2018 to 2021 -– making materials cost roughly $35,000 more.
Bank of America estimated the value of the raw materials in an average single-family home in America to be around $118,000 in 2021. Labor and land costs -– which can vary by region –- constitute the remaining two-thirds of the cost of a home, Jadrosich added.
“Home construction cost has consistently outpaced overall inflation over the last 40 years,” the report added.
Rising inflation in the U.S. is also contributing to an increase in prices of “household furnishings and operations,” a broad category that includes window and floor coverings and moving and freight expenses, among other items, according to the Bureau of Labor Statistics.
The index for household furnishings and operations rose by 0.4% over the month of May as compared to the previous month, and was up 8.9% from last year.
The Bank of America report, which factored in data from the National Association of Home Builders, detailed 14 components that go into building a house and how much they cost on average:
What materials go into building a home?
- Framing lumber/engineered wood
This category accounted for the largest percentage of all material in a home, at 30.2%. The cost of lumber content per home was around $35,488. Lumber prices have been on a wild ride over the last year. The commodity has come off all-time highs in 2021, when lumber prices had nearly tripled, particularly over the last four months of the year. That meant an increase of $18,600 in costs to an average new single-family home.
But experts are expecting demand to soften amid a slowdown in U.S. home sales.
“A significant factor in the price of lumber is the price of timber (the sawn tree),” the Bank of America report stated. The South “continues to be amply supplied in timber at present,” it added, “as standing inventory remains higher than post-Great Financial Crisis levels.”
- Concrete (foundation)
This category accounted for 8.9% of all content in a home, but was costly, at around $10,526.
- Windows and doors
Windows and doors have had a notorious reputation among builders over the last year, with many companies scrambling to find them.
While they only make up 8.9% of the total material per home, they are, like concrete, costly, at $10,519. Bank of America noted that windows and doors tend to be a labor intensive industry.
A shortage of windows has slowed down the construction process considerably, Jadrosich said. “You can’t finish a lot of the houses if you don’t have the windows in,” he explained. “You can’t put your appliances in, and paint the walls, and finish your floors, if the house isn’t sealed with windows.”
And until that supply chain for windows improves, “you’re gonna have a pretty slow, elongated build cycle for a lot of the home builders,” he added.
And with a shortage in specific items like windows, “it’s really difficult to live in the house if you don’t have them,” Jadrosich said. “Things like appliances, it’s hard to move in, or even get an appraisal until those are in the house. It can really, really slow down the process.”
- Siding
- Plumbing
Plumbing has been one of the sectors that has been hardest hit by the labor shortage, Bank of America said. “Employee retention will be critical to keep up with the rising demand,” they said.
- Cabinets
- HVAC
- Roofing
- Flooring
- Structural panels
- Wallboard/drywall
- Appliances
- Architectural coatings
- Fiberglass insulation
- Other
Let’s also not forget the various sub-sectors within homebuilding –- from flooring to paints.
And U.S. households may be facing an unseen cost as a result of rising prices in homebuilding: The average home in the U.S. has shrunk considerably over the years.
Bank of America noted that from 1982 to 2017, the average square footage of a home has declined eight times on a year-over-year basis, three of which was during and immediately after the global financial crisis.
The median square footage for a single-family home is now around 2,338 feet, according to fourth quarter data from the NAHB.
Got thoughts on the housing market? Write to MarketWatch reporter Aarthi Swaminathan at aarthi@marketwatch.com.
An oceanfront Santa Monica, Calif., home with two hot tubs is quietly asking $25 million, according to the owner, Australian entrepreneur and designer Kirk Lazarus.
Mr. Lazarus said he bought the property for $3.95 million in 2010 and spent about four years remodeling it. He moved into the house in 2015.
The owner, Kirk Lazarus, spent about four years remodeling the beach house.
Molori Design
Reclaimed-wood floors throughout the house come from Europe.
Molori Design
The kitchen.
Molori Design
A terrace off one of the bedrooms overlooks the ocean.
Molori Design
Amenities include a home theater.
Molori Design
The home has a hot tub on a top-floor balcony off one of the bedrooms. There is another hot tub adjacent to the swimming pool, he said. Other amenities include a room for Pilates and yoga, a massage room, a home theater, a gym and a spa with a steam room. Reclaimed-wood floors throughout the house come from Europe, he said, and a powder room is lined with Tiger’s Eye stone. In addition to the pool, the roughly 0.1-acre grounds contain an outdoor kitchen and a tropical garden with fruit trees. A gate provides access to the beach, where Mr. Lazarus has a volleyball net.
The house is being sold fully furnished, according to Mr. Lazarus. He hasn’t yet officially listed the house for sale, he said, because he is in no rush to sell. He is putting it on the rental market asking $85,000 a month, however, with Veronica Klein of Compass and Joyce Rey of Coldwell Banker Global Luxury. Mr. Lazarus said he plans to list the home for sale with Ms. Klein and Ms. Rey later this year. Real-estate agent Marc Cowan is helping to market the property.
The oceanfront house is one of several Mr. Lazarus said he has bought and remodeled along Palisades Beach Road. He is selling it because he is about to complete a remodel of the home next door and plans to live there.
Mr. Lazarus, who previously worked for the trading and mining company Glencore, now runs the interior-design and development company Molori.
In April, the median listing price in Santa Monica was $1.7 million, up 2.8% compared with the same time last year, according to data from Realtor.com.
Write to Libertina Brandt at Libertina.Brandt@wsj.com
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DraftKings Lands New Bull as Profitability Nears. This Analyst Also Likes Penn.
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Casinos are traditionally unaffected even in a recession scenario.
Ethan Miller/Getty Images
DraftKings and Penn National Gaming stocks will outperform the market by selling additional products to their existing customers, according to a new research note.
JMP analyst Jordan Bender on Tuesday initiated coverage on the gaming companies with a Market Outperform rating. He cited the market positions of
DraftKings
(ticker: DKNG) and
Penn National Gaming
(PENN) and sees an opportunity for both companies to sell from one channel to another, known as cross-selling.
DraftKings’ stock was down 2.9% to $13.20 on Tuesday whereas Penn National was up 0.8% to $32.58.
“For DKNG, iGaming is the obvious cross-sell,” said JMP’s Bender. DraftKings iGaming products like
Rocket
and Spanish21 are variations of real-life casino games that can be played online. Although they are geared toward a slightly different demographic, the analyst believes the company can use its growing marketplace to offer other services like to sell sports apparel and leverage its customer base.
Another reason for Bender’s rating was DraftKings’ market exposure. As North American online sports betting continues to grow and gets legalized in more states, Bender believes the company will be able to sustain its market share as one of the top-three U.S. players. Additionally, specialized products, like its partnership with micro-betting company SimpleBet, could help exceed long-term internal revenue targets, the analyst said. He forecasts it could reach $2.87 billion by 2023, more than 2% versus consensus.
Besides JPM, Jefferies analyst David Katz reinstated coverage of DraftKings (ticker: DKNG ) at a Buy just over a month ago, saying the risk/reward was highly favorable.
For Penn National, Bender likes that the company has leveraged its position between its casino database, and its acquired online assets Barstool Sports and theScore, managing to cross-sell to the different customer groups. These channels have proven to lower customer acquisition costs, he said,
Bender thinks there is an upside to Penn National’s shares even in a recessionary scenario. Casinos have traditionally been unaffected by inflation, gas prices, and downturns given the convenience of a regional casino and the entertainment it provides for a low spend, he said. Penn’s revenue only fell 3% during the financial crisis, according to Bender.
Katz agrees with Bender. Over a month ago, he wrote that he believes in “the relative benefit of regional gaming in uncertain times.”
Penn National has also managed to maintain its market share in the past year in the face of high levels of industrywide marketing and promotions. “We attribute the sticky market share to a more loyal Barstool player and casino database [and..] believe this bodes well as elevated marketing and promotion spending declines over the next year.”
Write to Karishma Vanjani at karishma.vanjani@dowjones.com
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