Jul 08, 2020

The Great Migration to the Suburbs?

By Ben Olien, CFA

The Great Migration to the Suburbs?

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 I know 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 I have spoken with 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). Housing demand appears to be strengthening.

Exhibit 1: Mortgage Applications and Interest Rates for Fixed-Rate Mortgages

Source: Yardeni Research, Inc.

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.

Exhibit 2: Housing Affordability Index and Initial Unemployment Claims

Source: Yardeni Research, Inc.

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.

Our view is 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. We continue to look for growth opportunities in the building products space for our investment strategies while cautiously watching for the potential negative impact of rising unemployment claims.

This information is not intended to provide investment advice. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, market sectors, other investments or to adopt any investment strategy or strategies. You should assess your own investment needs based on your individual financial circumstances and investment objectives. This material is not intended to be relied upon as a forecast or research. The opinions expressed are those of Driehaus Capital Management LLC (“Driehaus”) as of July 2020 and are subject to change at any time due to changes in market or economic conditions. The information has not been updated since July 2020 and may not reflect recent market activity. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Driehaus to be reliable and are not necessarily all inclusive. Driehaus does not guarantee the accuracy or completeness of this informa­tion. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

About Ben Olien, CFA

Ben Olien is a senior analyst on the US Growth Equities Team with a focus on the materials, energy, industrials and utilities sectors.

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