Homebuilders (LGIH)

snippets from an IBD article of 12/14/15

Homebuilder industry up by 21% this year.
LGIH up 142% but then lost 28% after Dec 2

Property info provider CoreLogic expects 30 year fixed to be at 4.5% by end of 2016 from around 3.8% now. Still low by historical standards. Fed increases should also mean a growing economy.

This I don’t like…
pointing out that above average insider selling in the homebuillding sector typically precedes pullbacks, JPMorga noted that most of LGI Homes’ 184,000 insider sales in November were from cofounder Thomas Lipar

New home sales about 500,000/year compared to historic average of 650K. (This was best year since 2007)

Builders still feel the burn of the crash and are not rushing out to accumulate land. This has helped lead to tight new-home inventory, resulting in slightly higher prices. But land and labor prices are affecting builders, they are building bigger homes with bigger profit margins.

LGIH goes out of its way to target budget buyers with smaller cheaper homes. DR Horton (Express Homes) is also appealing to entry-level buyers (they had second best stock return after LGIH).

Will Millennials Step Up

First time buyers still a small than usual percentage of buyers accounting for 25-30% of homes compared to 40% before the crash.

But next year could mark a turning point as millennials finally make their move. “It feels like you’re starting to see more participation from first-time buyers” Makkari said. “it feels like it will be a trend for next year”

“Good for LGIH” PuddinHead said.

Oil Problems??
Dallas prices increased by 9.1%. Energy capital Houston showed 6.8% price gains in October, but is slowing. Builders in Dallas and Austin may run up against difficult comps next year.

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Article #2
Not sure if it is free access, here are snippets:

Homebuilders Have Designs On Millennial Homebuyers

Courting millennials with houses geared to the high-tech-sharing generation’s tastes has become a priority for more homebuilders eyeing the younger crowd as a key to revving up first-time homebuying — and as potential generators of big sales and profits.
At 83.1 million strong, the millennials — people born between 1982 and 2000 — outnumber the 75.4 million baby boomers.
And while millennials have been skittish about moving into homeownership due to sparse financial resources, this generation — age 34 and younger — has represented the largest group of recent homebuyers for the last two years (at 32% of all buyers in 2014 and 31% in 2013), according to a survey by the National Association of Realtors.

But as noted in previous post, their share of homebuyers is small, smallest since 1987. (So lots of room to grow)

“As the largest generation of homebuyers, the millennials are a force that will drive homebuilding and homebuilders’ profits as well,” Jessica Lautz, NAR’s director of survey research and communications told IBD. “Because Generation Y (millennials) is such a large cohort, they will only grow as homebuyers in the market.”

Millennials have delayed household formation. (too much time on facebook and not enough time dating?)

“They’re now getting to an age and financial status where homebuying is important. We see the opportunity to increase market share by meeting their needs specifically.”…

Mitchell says the biggest takeaway from the research is that millennials “are gravitating toward homes with urban conveniences in suburban settings,” such as being within walking distance from parks and schools.

“Studies indicate that millennials ultimately have the same desire for homeownership that previous generations had,” said Cooper. “They are delaying marriage and having kids, which is (causing them to) delay becoming homeowners. But the desire for homeownership appears to be as strong as in previous generations.”

(I was not so sure of that, good to hear)

Article mentions Toll Brothers and a couple others but not LGIH.

Read More At Investor’s Business Daily: http://news.investors.com/business-inside-real-estate/110515…
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I really want to like this company, but I don’t buy the argument that millennials are getting more interested in home ownership.

As an older millennial myself, even if it becomes more affordable to buy a home, there is a significant loss of flexibility that comes with owning one. That big chunk of a down payment is also a tough hurdle.

I see a lot of people that don’t trust the banks and who have more of a freelance type of irregular income where they are more willing to commit to a rental than to a purchase when work and life may require being more mobile than generations past.

One thing they are getting right is the more technologically connected homes and such that some people do care about and the urban convenience in suburban settings thing.

But I really think that current generations simply don’t care as much about owning a home.
Quotes like “They’re now getting to an age and financial status where homebuying is important.” sounds like BS conjecture made up by a journalist to sell click on an article than reality.
Or the other example- Marriage and kids don’t make people want to buy a home. A desire to set down roots in one place does.

I think a part of the lower home ownership is that people either haven’t found a reason to set down roots somewhere or have not yet found the place where they desire to stay long term and have the financial/employment security to do so.

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Mike, thanks for the good feedback, I have an interest getting to know the biggest generation as you will set the trends.

First and foremost I am considering an investment in Chipotle as it begins to seem more reasonably priced, so did you and your friends eat at CMG in the past, has that changed since the E Coli scare, and if so do you think you will return to old habits at some point (when).

Now about you

Are you in an urban setting or a less populated place?
Do you think urban millennials have different home buying outlooks than non-urbans?
Do you live in a “cool” apartment?
Do you have your own car or do you use public transport and Uber or Zip cars?
Do you think you and your friends will get married sooner, about the same or later than your parent’s generation?
Do you have relatively small living accommodations because you spend a lot of time in public with your friends? (Like Sam Zell indicates)
Do you and your friends prefer to have a “steady and safe” corporate job or a “riskier but more rewarding” form of employment?
What future technology excites you and your friends enough to want to buy it?

Thanks
Pete, a baby boomer (barely, but not in my mind)

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I really want to like this company, but I don’t buy the argument that millennials are getting more interested in home ownership.

Hi Mike,
I’m not sure it’s millennials that they are targeting. It’s apartment dwellers. Here’s a snippet from my own experience. As we have gotten older we sold our house several years ago and rented a nice apartment. (This was in Texas, by the way). These are not the actual rental figures but examples. They give only a one-year lease at a time. It the rent the first year was $1000, the second year it was $1060, the third it was $1130, a slower year the next year and it was $1170. The amount may vary, but the rent is always going up. And this is Texas, the land of the supposed oil crunch.

Now if you are a younger apartment dweller and paying $1000 a month, and someone says I can give you a fixed rate mortgage at $980 a month, and you don’t have rising rents, you build some equity, and you have your own new home, that’s pretty appealing.

Just seems that way to me.

Saul

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First and foremost I am considering an investment in Chipotle as it begins to seem more reasonably priced, so did you and your friends eat at CMG in the past, has that changed since the E Coli scare, and if so do you think you will return to old habits at some point (when).

I used to eat there a lot as did a lot of my friends. Over time, the food quality has decreased though it still fits in that quality fast food at a decent value for what you get… but you can tell that even with their commitment to quality, it suffers a bit at their current scale. You can get much better mexican food almost anywhere. I think of it as mexican inspired american food. Lines used to be out the door during lunch time but since the e coli thing the locations are surprisingly slow and I have not gone into one myself.

I do realize that it’s likely completely safe and that there really have been that many cases given their scale, but it’s a big image problem and there are so many other alternatives out there so people will think twice. I actually got a minor case of food poisoning at a CMG many years ago when it was fairly new. After that I stayed away for a few months, but then went back.

I think its a great company but not yet to a price for a great investment. I’d be surprised to see good earnings and I think it may take a few quarters for this to blow over. I could see getting a small starter position soon, but I think there will be chances to buy under 400. It was too priced for perfection and I think comps will be lower than expected in the near term. For disclosure I have a put butterfly spread on CMG at the moment and may add some put verticals to carry through the next earnings release.

For your questions
Are you in an urban setting or a less populated place?

Urban - New York City

Do you think urban millennials have different home buying outlooks than non-urbans?

Yes, urbans likely are less interested due to the unattainability of buying in a lot of urban locales. I think in non-urban environments it is more possible, but the down payment hurdle is tough. I also think there is a premium for the flexibility of renting and the ability to not have the large chunk of mortgage debt as an obligation that is an argument against home ownership. Young people value that flexibility these days. Kind of like a liquidity premium on your living situation if that makes sense.

Do you live in a “cool” apartment?

No. Quite an old apartment because all the “cool” ones are far too expensive here. But they keep getting built all over and people keep moving in to them. But real estate here is an anomaly. No normal person can afford to buy anything here.

Do you have your own car or do you use public transport and Uber or Zip cars?

No car. Zipcar if I need one, otherwise Uber, cabs, & subway. Mostly subway and walking. Thought it would be weird when I first ditched the car, but no need for it and it’s one less thing to worry about.

Do you think you and your friends will get married sooner, about the same or later than your parent’s generation?

Later. Already too late for sooner. Most people I know buying first homes are late 30s early 40s. I know few people married before 30 and most don’t have kids before mid 30s.

Do you have relatively small living accommodations because you spend a lot of time in public with your friends? (Like Sam Zell indicates)

Yes small living accommodations but mostly because large ones are not affordable here. though I think the spending more time in public places with friends is as much a factor of people living in small spaces that are not conducive to having people over. It’s more correlation that cause-effect either way. However I do see people far less interested in having larger space than needed at home, even if they would like slightly larger space then they have.

Do you and your friends prefer to have a “steady and safe” corporate job or a “riskier but more rewarding” form of employment?

Most prefer the “riskier but more rewarding”, but a lot are still in the “steady and safe.” I’m recovering from the former and part of the latter now. I do know every I know is happier in the more rewarding but riskier, even if it creates some financial stressors.

What future technology excites you and your friends enough to want to buy it?
Great question, and hard to answer. Self driving cars could be one, but not to buy, just to use. Solar tech is exciting, as is new battery technology. Imagine a phone/tablet/laptop that would last longer and be recharged via solar cells. That would be awesome!
While not technology to buy per se, I also think the speculative fringes of medical science and biotech are doing amazing things, though its a very risky area to invest in and cannot be fundamental valued.

Hope that helps

Mike

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I’m not sure it’s millennials that they are targeting. It’s apartment dwellers

That’s a good point. There probably are a lot of apartment dwellers who are planning to stay in the area they live in and would prefer a fixed mortgage to the risk of rising rent. I know I hate wondering if my rent will increase every year before I see the renewal notice as moving is expensive and stressful too.

Now if you are a younger apartment dweller and paying $1000 a month, and someone says I can give you a fixed rate mortgage at $980 a month, and you don’t have rising rents, you build some equity, and you have your own new home, that’s pretty appealing.

While I see your point here, I think the appeal is mixed in spite of the fact that it makes more sense on a pure numbers basis. I think there are premiums renting affords in flexibility and providing more liquidity by not tying assets up in a down payment. Also when something breaks the landlord fixes it instead of you needing to so you don’t need to worry as much about those unintended expenses.

Ultimately I think the rent vs buy comes down to a factor of how stable people think their location will be and how flexible they may want it to be. But there are enough individuals out there who LGIHs homes will make sense for so I can see the appeal enough for a small starter position.

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Mike, thanks for the detailed reply, really appreciate it.

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