Shares of Realogy (RLGY) jumped +2.6% today on news U.S. home prices are near three-year highs. The S&P/Case-Shiller 20-city index rose 5.7% year-over-year in the three-month period ending in January.
As skittish investors fretted over rising interest rates and a post-Election Day hangover in housing, Hedgeye Housing analyst Josh Steiner and Christian Drake recently suggested investors get long the $4 billion real estate brokerage franchisor.
During their long Realogy call last week, an institutional subscriber asked Steiner and Drake, “What gives you confidence volume and home prices will improve in the face of rising rates.”
For more, watch the video above, but it essentially boils down to this:
- Interest rates matter in the short term. It compresses affordability and both volumes and prices decelerate.
- But the effect is transitory. “Once you’ve moved beyond that expedited period of rate increases, volumes reaccelerate in both units and in prices,” Steiner says.
- “What you typically see when rates rise sharply,” Drake adds, “is a time shifting effect, and a pull forward in demand.” After this period, there’s a brief hangover “but we’re moving past that now and volumes are holding steady and stepping higher.”
- On Realogy specifically, concerns of rising rates “have been baked into the stock” since early 2016, Steiner says.
Add in the recent acceleration in U.S. economic data. US Consumer Confidence hit a 196-month high this morning. For investors looking for exposure to U.S. economic growth, Realogy is also a way to build exposure to the High-End Housing market, which is turning around with the recent run-up in the stock market.
Here's an excerpt of Steiner and Drake's recent institutional call on Realogy:
- High End Housing Rebound? The High-End segment has been battered over the past few years alongside muted financial asset price inflation and a general slowdown in high-ticket discretionary consumption, but luxury spending trends are showing signs of life of late. This bodes well for Realogy, especially its NRT segment which includes the high end brands Corcoran and Sotheby’s, and is concentrated in more affluent areas.
Stay long Realogy here.
