The Big Long? A Deep Dive on U.S. Housing (Part 4) — Part 4 – What Slow Down? Recent Commentary from Builders and Building Product Companies

Theme and Background

This chapter focuses on the current real condition of the U.S. housing market, refuting the pessimistic "imminent housing crash" narrative popular on social media. The author points out that despite rising interest rates, direct feedback from industry operators stands in stark contrast to market panic, with demand remaining robust.

Core Argument

The author's central thesis is: The U.S. housing market is far from the 2006–2009 crisis level, demand drivers remain intact, and homebuyer quality is at an all-time high. Counterintuitive insights include: higher interest rates have not eliminated demand, but instead supported the market due to supply shortages and demographic factors; current homebuyers' credit profiles and financial buffers far exceed those of historical periods.

Key Arguments and Data

• Demand remains strong: Century Communities reports "demand far exceeds available supply" and sees no pricing resistance; Taylor Morrison Homes noted that its cancellation rate in Q1 was only ~6%, historically low.
• High homebuyer quality: Multiple builders report average credit scores between 730 and 752, down payment percentages as high as 16%–24%, and 82% of conventional loan borrowers can withstand a rate hike of 650 basis points above their actual rate.
• Severe supply shortage: Beazer Homes points out that current unsold inventory is only a quarter of its 2006 level; Tri Pointe Homes emphasizes "there is no supply," in stark contrast to the 2018 rate hike environment.
• Demographic support: Millennials and Gen Z are entering their prime homebuying years, with demand driven by life events such as marriage, family formation, and job relocation.

Comparative Data Table:

Indicator	Current Data	Historical/Comparative Data
Cancellation rate	Taylor Morrison: ~6%; Meritage: 9.6%	Historically low; Meritage below its historical level
Average credit score	Taylor Morrison: 752; Tri Pointe: 749; M/I Home: 747; Meritage: 730+	All-time high
Average down payment ratio	Taylor Morrison: 24%; M/I Home: >16%	Higher than the same period last year
Interest rate tolerance	82% of borrowers can withstand a +650 bps hike	Far above current rate level
Share of buyers halting search	Single-digit percentage	Double the current level during the 2018 rate hike
Unsold inventory	Only a quarter of 2006 level	2006 inventory was extremely high

Companies/Assets Involved

• Century Communities: Bullish. Reports demand far exceeds supply, sees no pricing resistance, and monthly sales continue to grow.
• Taylor Morrison Homes: Bullish. Cancellation rate at historical lows, homebuyer credit scores and down payments at all-time highs, demand resilience exceeding expectations.
• Tri Pointe Homes: Bullish. Millennials are the primary demand source, supply shortage will persist for years, fundamentals are healthy.
• M/I Home: Bullish. Homebuyer credit quality is "best ever," Millennials and Gen Z are entering the market.
• Meritage Homes: Bullish. Cancellation rate low and stable, share of entry-level products rose to 83%, demand metrics strong.
• Beazer Homes: Bullish. Structural supply-demand gap cannot be resolved in a few years, unsold inventory is only a quarter of its 2006 level.

Investment Implications

• Go long on homebuilder stocks: Based on demand resilience, supply shortages, and homebuyer quality, builder earnings prospects are positive, and valuations may be undervalued.
• Be wary of short-side risk: Market panic may be overdone, short positions face a squeeze risk.
• Focus on demographic dividends: Millennial and Gen Z demand will persist for years, making builders direct beneficiaries.
• Limited impact of interest rates: Current homebuyers' financial buffers are strong, and the dampening effect of rate hikes on demand is far below that of 2018.

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Theme and Background

This chapter cites public statements made by multiple U.S. homebuilders, home improvement retailers, and building material suppliers during their April–May 2022 earnings conference calls to argue that the U.S. housing market remains healthy despite rapidly rising interest rates. The report aims to counter market fears of a housing crash, emphasizing that the current market structure is fundamentally different from the 2006–2009 crisis.

Core Thesis

The author’s central judgment is: The U.S. housing market is fundamentally sound; rising interest rates have not crushed demand. Instead, owing to supply shortages and excellent borrower credit quality, the market remains in a state of supply shortage. Counterintuitive conclusions include:

• Rising rates have minimal impact on home improvement spending and may even benefit from buyers shifting to renovations.
• Cancellation rates, though slightly elevated, remain at historic lows, and departing buyers are quickly replaced by new ones.
• The current market differs from the 2018 rate shock, with stronger demand resilience.

Key Arguments and Data

1. Mortgage Market Health

• Loan portfolio credit quality is high, with loan-to-value (LTV) ratios near historic lows.
• Virtually no adjustable-rate mortgages face imminent repricing risk.

2. Homebuilder Demand Indicators

Company	Key Statements	Supporting Data
M.D.C. Holdings	Demand is broad across geographies and price points, with millennials as the primary driver.	Buyers are migrating from high-cost to low-cost regions.
D.R. Horton	Number of qualified buyers still exceeds supply capacity.	Cancellation rate fluctuation of only 1% is considered "essentially flat" and remains at historic lows (normal is 17–20%); exiting buyers "have a queue behind them."
Taylor Morrison (mentioned earlier)	Cancellation rate is ~6%.	Average buyer credit score: 752; average down payment: 24%; 82% of conventional loan borrowers can withstand a 650 bps rate increase.

3. Optimistic Signals from Home Improvement Retailers and Building Material Suppliers

Company	Core View	Data/Facts
Home Depot	Homeowner balance sheets have never been healthier; rates are not sensitive to home improvement spending.	Pro backlogs at all-time highs; those unable to buy a home are turning to renovations.
Lowe's	Pro business at historically strongest levels.	50% of U.S. homes are over 40 years old; 2/3 of sales come from repair and maintenance; historical data shows the home improvement industry benefits under high interest rates with a good economy.
Masco	International demand is strong, supported by structural factors.	2.7 million homes will enter the prime renovation window (20–39 years old) over the next 3 years; order backlog stands at 30 weeks; the company is accelerating buybacks amid share price declines.
Sherwin Williams	Demand for professional architectural paint in North America is strong.	Rising rates have not had a noticeable impact on new home demand; even if new construction slows, residential repaint and property management businesses are more defensive.

4. Structural Demand Drivers

• Millennials entering prime homebuying age, household formation changes, asset accumulation needs, and remote work driving migration from high-cost to low-cost regions.
• 50% of U.S. homes are over 40 years old, creating inelastic repair and maintenance demand.
• Homeowner balance sheets are healthy, with renovation investment viewed as "one of the safest investments."

Companies/Assets Covered

• M.D.C. Holdings (Bullish): Broad demand, buyers adapting to higher rates, minimal change in cancellation rates.
• D.R. Horton (Bullish): Qualified buyers still outpace supply, cancellation rates at historic lows, departing buyers are quickly replaced.
• Home Depot (Bullish): Homeowner financial health is strong, rates have minimal impact on home improvement demand, renovation needs increase as home purchases become harder.
• Lowe's (Bullish): Pro business at historic highs, structural growth in repair and maintenance, historical data shows home improvement benefits from high rates and a good economy.
• Masco (Bullish): Strong international demand, structural support, company sees shares as undervalued and is accelerating buybacks.
• Sherwin Williams (Bullish): New home demand not significantly impacted by rates, with a defensive business mix.

Investment Implications

• Go long homebuilders and home improvement-related stocks: The current market is not a repeat of the 2008 crisis, but a structural bull market characterized by supply shortages and demand resilience. Earnings prospects for homebuilders (e.g., D.R. Horton, M.D.C. Holdings) and home improvement retailers (Home Depot, Lowe's) remain strong.
• Focus on the defensiveness of building material suppliers: Companies like Masco and Sherwin Williams benefit not only from new construction but also from renovation and repair markets, which are rate-insensitive and have structural growth drivers.
• Contrarian positioning amid market panic: Masco explicitly stated that the current share price decline is a "mispriced" opportunity and is accelerating buybacks. Investors can look for high-quality housing-related stocks that have been oversold due to rate fears.

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Theme and Background

This chapter presents the real demand conditions in the current U.S. housing market by citing management commentary from multiple U.S. residential industry leaders during their late-April 2022 earnings conference calls. The report aims to refute the pessimistic market narrative that rising interest rates will trigger a housing market crash, emphasizing that demand remains robust and that industry fundamentals are fundamentally different from those before the 2006–2009 crisis.

Core Thesis

The author's central judgment is: U.S. housing demand has not materially weakened due to rising interest rates. Management teams at multiple companies have reported record or historically high order backlogs and remain highly optimistic about future demand prospects. Counterintuitively, despite widespread market concern that rate hikes will suppress demand, actual corporate feedback indicates that demand still far exceeds supply, and this supply–demand imbalance is a long-term structural result of underbuilding in the housing sector over the past decade, not a short-term phenomenon.

Key Arguments and Data

• Residential Repaint: Customer order backlogs are "very strong," and the 2022 LIRA (Leading Indicator of Remodeling Activity) forecasts double-digit growth. The NAHB Remodeling Market Index is well above 50 (the breakeven point), and contractors generally see solid project backlogs through year-end.
• Commercial Real Estate: Both the Dodge Momentum Index and the Architectural Billings Index are strong, with the latter having been positive for several consecutive months, typically leading commercial construction spending by 9–12 months.
• Property Maintenance: Deferred maintenance demand is being released, with improvements in apartment turnover, tourism, office, and school segments.
• Flooring (Mohawk): Market conditions remain favorable despite rising interest rates. Unemployment is low, wages are rising, millennials are entering home-buying age, housing inventory is at historic lows, single-family housing starts are increasing, and the housing gap will take years to close. Remodeling demand remains strong due to rising home equity.
• Insulation (Owens Corning): Both the U.S. residential renovation and new construction markets remain strong, and backlogs for commercial building products continue. The U.S. housing market has been underbuilt over the past decade, creating significant "catch-up" demand, and the residential insulation business has long-term tailwinds even in a high-rate environment.
• Pool Equipment (Hayward): New pool permits already extend into 2023, builder order backlogs are strong, the 2022 order book is very robust, and most builders are already quoting through 2023.
• Appliances (Whirlpool): Demand is "very strong," far outstripping supply, and this situation has persisted for multiple quarters. The company believes demand will not disappear and that housing demand will remain strong for the long term. Management explicitly stated they "do not see where the uncertainty in demand is" and expressed "unprecedented" optimism about long-term consumer trends in North America.

Comparison Table:

Company	Industry	Core Judgment	Key Data/Indicators
Mohawk	Flooring	Market conditions favorable, demand strong	Housing inventory at historic lows; LIRA forecasts double-digit growth in 2022
Owens Corning	Insulation	Residential and commercial demand strong, backlogs persist	U.S. housing underbuilt over past decade; completion rates lag
Hayward	Pool Equipment	New pool demand extends into 2023	Builder order backlogs strong; quotes extending into 2023
Whirlpool	Appliances	Demand far exceeds supply, extremely optimistic long-term	Demand "very strong"; management "unprecedentedly" optimistic

Companies/Assets Involved

• Mohawk Industries (Flooring): Bullish. Management believes market conditions are favorable, renovation demand is strong, and the housing gap will take years to close.
• Owens Corning (Insulation): Bullish. Both residential and commercial demand are strong, backlogs persist, and the company believes there is significant "catch-up" demand in U.S. housing.
• Hayward Holdings (Pool Equipment): Bullish. New pool permits extend into 2023, and order backlogs are strong.
• Whirlpool Corporation (Appliances): Bullish. Demand far exceeds supply, and management is extremely optimistic about long-term demand, seeing no slowdown due to rising rates.

Investment Implications

• Do not be overly pessimistic about rising interest rates: Actual corporate feedback shows that demand fundamentals remain robust, and order backlogs are at historical highs—a stark contrast to the widespread fear of "demand collapse."
• Focus on structural supply–demand imbalances: The supply gap caused by underbuilding over the past decade is a long-term driver that short-term rate fluctuations cannot reverse. Investors should focus on residential-related companies benefiting from this structural trend.
• Watch for inflation and supply chain risks: Despite strong demand, all management teams mentioned inflation and supply chain issues as manageable but serious constraints that could affect corporate profitability and delivery capabilities.
• Next chapter: housing affordability: The report previews an in-depth analysis of the housing affordability debate, a key area investors should monitor to assess the long-term impact of rising rates on demand.