Wall Street Meets Main Street

The Atlanta Real Estate Report is a podcast & companion website for those interested in the Atlanta real estate market. This includes individual buyers, sellers and investors. It also includes architects, builders, developers, lenders, realtors and urban planners; anyone working in or supporting the local real estate ecosystem.

NEW » In addition to the Substack app, this podcast is available on Spotify and Apple Podcast.

PRO TIP » The text portion of this podcast contains dozens of hyperlinks, charts and graphs that are integral to the discussion. If you can have that open (preferrably on a desktop computer) while listening to the audio portion, you will get A LOT more out of it.

In this episode, we will…

1. Consider how and where Wall Street and Main Street meet

2. Discuss the benefits of understanding this dynamic intersection

3. Look at some publicly-traded companies in the housing sector

4. Explore how these Wall Street companies impact Main Street

5. Learn what we can glean from stock charts and earnings announcements

6. Take a sip from the Wall Street “fire hydrant”

Future Episodes…

• Looking Ahead to 2023…

• Institutional Investors: Who are they, and how do they impact the housing market?

• Real Estate Investment Trusts (REITs)

• Resources: Newsletters + Podcasts + YouTube channels

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Let’s start with some definitions…

Wall Street is the name of a street in Lower Manhattan that began life in the 17th century as the wall that formed the northern boundary of the New Amsterdam settlement. Today, when people refer to Wall Street, the term encompasses the businesses directly related to stock exchanges and the financial market. Even more broadly, the term, "Wall Street" has come to symbolize big business and investing in the United States. Source: Library of Congress

For the purposes of this discussion, the term “Wall Street” refers to the capital markets, in general, but especially equities. Our primary focus will be on publicly-traded companies in the real estate sector. The term, “Main Street” refers to economic activity, both at the local and national level. It also refers to us, as contributors to and beneficiaries of that econmic activity.

Main Street, U.S.A. is the first "themed land" inside the main entrance of the many theme parks operated or licensed by The Walt Disney Company around the world. Main Street, U.S.A. is themed to resemble American small towns during the early 20th Century. Photo by Walt Disney Corp. — For the purposes of this conversation, the term “Main Street” is a metaphor for the Average American.

“When it comes to real estate, there are two ways we can benefit by understanding the relationship that exists between Wall Street and Main Street. The first lies in our ability to build equity by becoming owners in some of the most dynamic companies in the world. That is, to participate in the growth of this industry in ways that go beyond owning property directly. The second relates to the insights we can gain from the regular (required) reporting of the financial performance of these companies.”

Publicly Traded Companies: A Primer

• What defines a “public” company?

  • They go from private to public via an Initial Public Offering (IPO)

  • Securities trade in the public markets (NYSE, NASDAQ)

  • Business and financial information disclosed to the public on a regular basis

• Ways to invest in publicly traded companies

  • Stocks = Equity = Owner = Wealth Creation

  • Bonds = Debt = Creditor = Income Generation

  • Derivitives (options & futures) — hedging, speculation and income generation

  • Investing vs. Trading (own vs rent; local vs tourist)

• Many people own public companies directly in the form of individual stocks and/or participate indirectly via ETFs, mutual funds and 401k plans

• Typically, larger than private companies

• Regional, national or international footprint

  • Private companies tend to be local, especially in the residential RE space

• Continuous and real time “price discovery” while the markets are open

  • Subtle but important point

  • Makes them highly liquid

  • Contrast this to direct ownership of real property

  • Highly efficient vs highly inefficient pricing (objective vs subjective)

  • This is the key difference between stocks and real property!

• Stock prices are a leading indicator of…

  • Economic activity at the index level (DJIA, S&P 500, etc.)

  • Industry trends at the industry level (banks, home builders, etc.)

  • A company’s outlook at the stock-specific level

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Let’s look at a few charts to gain some perspective…

The sheer size of the equity markets makes them a powerful force when it comes to their economic impact on Main Street…

> > > Click on the images below to enlarge the charts…

The U.S. equity markets are the largest in the world and continue to be among the deepest, most liquid and most efficient, representing 46.2% of the $111 trillion global equity market cap, or $51 trillion. This is 4.3x the next largest market, China. U.S. market share has averaged 37.4% over the last 10 years, troughing at 32.9% in 2012 and peaking at 46.2% as of 3Q22. Source: Securities Industry and Financial Markets Association — Chart provided for educational purposes only

$25.7 trillion — 50-year chart of U.S. GDP. GDP serves as a gauge of our economy’s overall size and health. GDP measures the total market value (gross) of all U.S. (domestic) goods and services produced (product) in a given year. Source: Federal Reserve Bank of St. Louis

Current: 150% — Market Cap to GDP is a long-term valuation indicator for stocks. It has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment." Source: LongTermTrends.com — Chart provided for educational purposes only

In the chart above, note the move from the GFC low in 2009 to the pandemic high of late 2021. Equity market cap rose from about 50% to almost 200% of GDP. That is one heck of a run!

Note the relatively high valuations of the real estate sector (P/E=39.3) and the relatively low share of S&P500 (2.8%). P/E and sector data as of Sept 2022. These values change constantly and may be very different when you view this chart. Source: SIFMA Research Quarterlies, 3Q/2022 — Chart provided for educational purposes only

Stock prices and the business cycle…

The stock market and the economy look in different directions. The stock market is forward looking. The price you are willing to pay for a stock today is based on how well you and other investors expect the company to do in the future. By contrast, some economic data looks back at what has already happened. For example, employment numbers show how many people are actively out of work. This indicator tends to lag the broader economy because businesses often react to how the economy is faring when they make hiring and layoff decisions. The forward-looking nature of the stock market tends to mean it often leads the economic cycle, as seen in the chart below. Source: RBC Global Asset Management

Stock prices and building permits are leading indicators…

The US LEI fell sharply in November, continuing the slide it’s been on for most of 2022 after peaking in February. Only stock prices contributed positively to the US LEI in November. Labor market, manufacturing, and housing indicators all weakened, reflecting serious headwinds to economic growth. Interest rate spread and manufacturing new orders components were essentially unchanged in November, confirming a lack of economic growth momentum in the near term. Source: The Conference Board

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Let’s look at some publicly-traded companies* in the housing sector…

Disclaimer: All of the information below has been provided for educational purposes only. I am not a financial advisor and nothing in this podcast / newsletter should be construed as investment advice. If you decide to invest based on anything you hear or read here, you MUST do your own research and seek the advice of a financial professional BEFORE doing so. Thank you.

Publicly-traded companies are the “fulcrum” between Wall Street and Main Street. They allow us to participate in the long-term growth of the real estate industry with a much lower investment than owning real property directly — and, in the case of rental property, with less headaches. They also allow us to focus our investment capital on very specific sectors and segments of the industry.

> > > Click on the company names below to access their investor relations pages…

• Home Builders — DR Horton + Century Communities + Lennar + Pulte Group + Meritage + Taylor Morrison + Green Brick Partners + Toll Brothers + Beazer + LGI

• Banks — Truist + Bank of America + Wells Fargo + Synovus + Ameris + United Community + JP Morgan Chase + Regions + South State + OZK

• Mortgage — Rocket + United Wholesale + Loan Depot

• Residential Brokerage — Anywhere + Berkshire Hathaway + Compass + + RE/MAX

• iBuyers & Hybrids — eXp + Offerpad + Opendoor + Redfin + Zillow

• Single-Family Home Rental — American Homes 4 Rent + Invitation Homes

• Commercial — CBRE + Cushman & Wakefield + JLL + Colliers

• Building Supplies — A.O. Smith + Carrier + Owens Corning + Home Depot + Mohawk Industries + Sherwin Williams

• Home Furnishings — RH + Sonos + Lazy Boy + Sealy + Wayfair + Williams-Sonoma

• Exchange Traded Funds (ETFs) — SPDR® S&P® Homebuilders ETF + iShares U.S. Home Construction ETF + Invesco Dynamic Building & Construction ETF + Hoya Capital Housing ETF

• Real Estate Investment Trusts (REITs) — Separate topic / future episode

  • Public REITs own 535,000 properties across the U.S. as of year-end 2020.

  • Equity and mortgage REITs combined own roughly $3 trillion in gross real estate assets.

  • Private REITs own an additional $1.5 trillion in gross assets bringing the total REIT ownership value to $4.5 trillion in the U.S. as of year-end 2021.

  • U.S. REITs contributed the equivalent of an estimated 3.2 million full-time jobs to the economy in 2021 generating $229 billion of labor income.

  • REIT activities resulted in the distribution of $92.3 billion of dividend income in 2021.

  • Source: Nareit

NOTES:

Keep in mind that this a small sample of the PUBLIC companies that operate in the real estate industry. As such, they are some of the largest in their respective categories. These are HUGE companies. There are also thousands of PRIVATE companies (typically much smaller) that also contribute greatly to the real estate economy, especially in the way of builders, brokerage companies and mortgage companies.

Clicking on the company names will take you to their investor relations pages. Look for press releases, investor presentations, conference calls and webcasts.

The names listed under “Home Builders” and “Banks” are the Top 10 publicly traded companies operating in the Atlanta region for their respective categories. Note that these rankings may change from year to year.

The real estate “ecosystem” is dynamic and really interesting…

> > > Click on the images below to enlarge the charts…

This slide describes the Hoya Capital Housing Index. Note the four subsectors of the housing industry and their weighting in the index. Source: Hoya Capital — Chart provided for educational purposes only

This slide shows the a collection of companies that make up the RE Tech Ecosystem. Note the nine business segments represented. Source: Hoya Capital — Chart provided for educational purposes only

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What can we glean from stock price charts?

Disclaimer: All of the information below has been provided for educational purposes only. I am not a financial advisor and nothing in this podcast / newsletter should be construed as investment advice. If you decide to invest based on anything you hear or read here, you MUST do your own research and seek the advice of a financial professional BEFORE doing so. Thank you.

Within a given sub-sector, stock returns can vary significantly…

> > > Click on the images below to enlarge the charts…

10-year stock price comparison of DR Horton, Toll Brothers, Lennar, Taylor Morrison and Pulte. Arlington-based DR Horton (DHI) had the best performance with a total return of 260%. — Chart provided for educational purposes only

“Stock price charts provide us with a portal into the past, present and future of a company, an industry or the entire economy. They are especially useful when evaluating price action over various time periods and in relation to other companies or benchmarks (i.e., relative performance). Charts enable us to understand the impact external events (shocks) such as a pandemic, recession, etc. Technical analysis of charts allows us to make informed decisions about future price action.”

10-year stock price comparison of Wells Fargo, Bank of America, Truist, Synovus and Ameris. Buckhead-based Ameris (ABCB) had the best performance with a total return of 282%. — Chart provided for educational purposes only

Speaking of home builders…

Looking at Home Builder sentiment in year over year terms (orange), we have never seen this kind of change (to the downside) for ⁦NAHB Housing Market Index. Source: Liz Ann Sonders, Chief Investment Strategist at Charles Schwab — Chart provided for educational purposes only

December 2022 Home Builder Sentiment fell further into "negative" territory, now at 31 vs the est of 34 (50 = neutral, so this is 19 points below neutral). Weakening in the Present Sales component drove the decline. Source: Liz Young, Investment Strategist at SoFi — Chart provided for educational purposes only

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How do these Wall Street companies impact Main Street?

1. Access to capital

2. M&A activity

3. Economic impact

4. Wealth effect

Access to Capital

• By tapping equity & debt markets

• Use for expansion, R&D (innovation)

Source: SIFMA Research Quarterlies, 3Q/2022 — Chart provided for educational purposes only

Source: SIFMA Research Quarterlies, 3Q/2022 — Chart provided for educational purposes only

Going public in a bear market…

3-year stock price chart for Compass, Open Door, DR Horton, Home Depot vs S&P500. OPEN went public on 12/21/20 @ $29.50/share. COMP went public on 4/1/22 @ $18/share. As of 12/19/22, OPEN was trading at $1.32/share and COMP was trading at $2.44/share. — Chart provided for educational purposes only

Timing is everything…

5-year chart of SPY (S&P500 ETF). The goal of investment bankers is to maximize the amount of capital derived by their clients from a liquidity event (e.g., IPO). How did they do on the OPEN and COMP deals? — Chart provided for educational purposes only

Mergers & Acquisitions

• Public + private combos create a liquidity event at the local level (e.g., Green Brick + Providence Group, 2011)

• Public + public combos seek to create diversification, scale and/or synergy (e.g., Home Depot + HD Supply, 2020) — MRO (Maintenance, Repair, and Operations)

• Especially significant in CRE market (size)

  • Primarily REITs and public companies like Blackstone and Blackrock

  • Private equity, pension funds and foreign investors

2021 Global CRE Sales + M&A Volume — Source: Deloitte

Economic Impact

• Huge multiplier effect

• Residential Housing: 15-18% of GDP ($3.9 - 4.7 trillion) + 33% of consumer spending (Source: NAHP + Hoya Capital)

• Commercial Real Estate: $1.2 trillion in GDP + $418.7 billion in salaries and wages (Source: NAIOP)

• Commercial Real Estate: 8.5 million jobs

• Construction employment = 7.6 million jobs (3.1M residential)

• Construction jobs: ~300,000 to 400,000 per month

NOTE: Economic impact and employment data are for the entire real estate industry, which includes both public and private companies

This slide shows the amount (share) of annual consumer spending represented by housing (left). It also shows the weighting of the real estate sector in the S&P 500 (right). Source: Hoya Capital — Chart provided for educational purposes only

Wealth Effect

• Equities = ownership = wealth creation

  • Bear markets lead to wealth destruction which, in turn, can lead to demand destruction (including real estate and related sub-sectors)

• Stock prices affect consumer confidence which, in turn, impacts consumer spending

• Most 401(k) plans invest in stocks

$31.6 trillion — 20-year chart showing the value of corporate equities and mutual funds held by U.S. households. Source: Federal Reserve Bank of St. Louis

$29.6 trillion — 20-year chart showing real estate equity owned by U.S. households. Source: Federal Reserve Bank of St. Louis

Current 344.8 — House Price Index for Atlanta-Sandy Springs-Alpharetta, GA (MSA) INDEX = 100 (1995) — Federal Reserve Bank of St. Louis (FRED)

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Taking a sip from the Wall Street “fire hydrant”

1. Earnings announcements

   1. Impact

      1. Announcements impacts stock prices in the short term

      2. EPS growth rate (predictablity and sustainability) impacts price in the longer term

   2. Investors focus on…

      1. Reported vs Expected (Concensus) — by “The Street”

      2. Guidance — provided to Wall St analysts by company management

2. Financial Statements

   1. Quarterly

   2. Annual

3. Investor Relations

   1. Earnings Calls (live + recorded)

   2. Investor Presentations

4. Research Reports

   1. Wall Street Analysts

      1. Company and industry / sector specific

      2. Strategy (asset allocation, market outlooks, etc.)

      3. Economic forecasts (consumer spending, etc.)

      4. Thematic (innovation, etc.)

   2. Company-sponsored content

   3. Third-party (Market Watch, Seeking Alpha, etc.)

5. Financial journalism

   1. Barron’s, Bloomberg, CNBC, Financial Times, Forbes, Fortune, Wall Street Journal, etc.

      1. Free vs. subscription-based

   2. Bloggers, vloggers & podcasters

6. Social media

   1. Twitter — preferred platform for journalists

   2. YouTube — long-form content; interviews

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