Reece's American squeeze

In 2018, Peter Wilson and his fellow shareholders in plumbing supplies group Reece Ltd stepped onto one of the biggest escalators of recent times. Reece purchased the medium-sized plumbing wholesale business Morsco just before the US housing cycle turned sharply upwards and the number of new homes being built surged 41 per cent. 

For a couple of years, as taps and valves flew off Morsco's shelves, Wilson looked like a genius. He could do no wrong as the Reece share price surged to an all-time high of $29.20, making the three branches of the Wilson family that control the company even more absurdly rich than they already were.

Now the reverse has occurred. Surging US mortgage interest rates have seen new US home starts fall 21 percent (four million fewer homes annualised) and also crunch the level of home renovations. Winter is not just coming for US plumbing distributors, it is actually here.  

The Australian equity market is asking the question: how much lower can the US real estate escalator drag Reece down with it? Nobody knows, but any further increases in US 10-year bond rates – which set the price of 30-year mortgages – will inflict more pain.