LGIH - An extraordinary news story:

This came into one of my news feeds because Amazon was mentioned in it. LGIH wasn’t even mentioned, but it sure makes LGIH’s expansion in the Seattle area look like a bit of genius! they’ll sell their houses as fast as they can build them (probably even a lot faster).

Saul

Jan. 18–Why is it so expensive to buy a house in Seattle right now? Everyone seems to have someone to blame: Amazon, priced-out Californians, foreign buyers, developers tearing down old homes to build huge new ones. But people in the real-estate industry point to a much broader problem: No one is selling their house.

Just 0.4% of all homes in the Seattle region were on the market at any given time last year – a lower rate than in any U.S. metro area except San Francisco. It’s more than three times worse than the national average, creating a market heavily tilted against buyers. 41 people recently made offers on a toxic West Seattle house that was too dangerous to enter and ultimately sold, as a likely teardown, for $427,000.

You’d think homeowners would be eager to sell and cash in on their big profits: Home values in Greater Seattle have soared about 60% in the last half-decade. However, brokers say homeowners don’t want to sell because they don’t want to have to turn around and buy another pricey home. Those homes that do hit the market are often sold before the “for sale” sign is staked into the front yard.

While the lack of housing inventory has been a growing problem for years the pickings are especially slim right now. The number of homes for sale last month hit its lowest point on record: just 1,600 houses, mostly in the suburbs, down from 7,400 houses six years prior. That doesn’t come anywhere close to meeting the demand. Yet even the small number of homes doesn’t tell the whole story. A disproportionately high number of houses on the market are luxury homes, because those typically take the longest to sell.

There were only 81 houses in all Seattle available for less than half a million dollars, and some of those are auctions and foreclosures. Seattle has only about 260 homes for sale under $1 million. Its biggest impact is on prices. Supply is dwindling at a time when demand keeps rising with job and population growth, and renters keep getting fed up with pricey apartments.

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What’s causing today’s sell-off? I am tempted to buy more here…

No news that I can find.
Normal market vicissitudes I gather.

A.J.

I added a tiny, tiny, bit today to my already very large position, but don’t get carried away. I’m certainly not always right.
Saul

interest rates are moving up. Here is something to think about. The home prices and ASP are raising at much faster rate compared to GDP growth. LGIH is servicing first time home buyers and even factoring coastal areas the price raise seems higher. Is it sustainable? or will it impact their sales?

Saul,

So here in Santa Monica it’s the same problem. No one is selling and prices are at nose bleed levels, along with rents that now are as high and sometimes higher then SF and NYC. Crazy.

I bought a loft here 2.5 years ago and it’s already up 40%.

So here is my question. I’ve heard talk that millennials are not going to be home buyers.
So if LGIH is catering to mostly entry level buyers, is that a shrinking demographic going forward?

My own possible counter to that, something that just popped in my head, if rents continue up or even stay where they are, now 40% of monthly incomes and higher in many places, does that force renters into the home ownership market? Is that what LGIH is banking on.

I know that even in Phoenix now, rents have doubled and tripled from 2009. When rents reach 40% or more of monthly incomes, you have a breaking point. People just don’t have disposable income at that point for nights out. Another reason that I think the restaurant industry bubble is beginning to leak.

Chris

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if rents continue up or even stay where they are, now 40% of monthly incomes and higher in many places, does that force renters into the home ownership market? Is that what LGIH is banking on.

Hi Chris,
You got it! That is exactly their sales pitch. They advertise directly to the people in the apartment complexes near their developments. They say “You can own your own house for approximately what you are paying now in rent! Your rents will go up, but your housing payments are fixed. And your house value will probably rise.” That’s a sales pitch that’s hard to resist. They don’t sell through the listing services, but directly. They have standard designs which also keep the costs down. They sell everything they build. Revenue in millions has gone:


2012   $143 
2013   $241
2014   $383
2015   $630
2016   $835 est 

Earnings in cents:

2012     43 
2013    107
2014    138
2015    250
2016    335 est 

Their PE is only 9.4 because they get lumped in with the industry of slow growing, dinosaur home builders.

Just the way I see it

Saul

7 Likes

So here is my question. I’ve heard talk that millennials are not going to be home buyers.
So if LGIH is catering to mostly entry level buyers, is that a shrinking demographic going forward?

Several articles I’ve posted here have shown data that millennials are driving a lot of entry level home buying.
You could search this board for posts on LGIH to find them.

Here’s a quick piece on population changes of the various generations in the years ahead.

Millennials have surpassed Baby Boomers as the nation’s largest living generation, according to population estimates released this month by the U.S. Census Bureau. Millennials, whom we define as those ages 18-34 in 2015, now number 75.4 million, surpassing the 74.9 million Baby Boomers (ages 51-69). And Generation X (ages 35-50 in 2015) is projected to pass the Boomers in population by 2028…

http://www.pewresearch.org/fact-tank/2016/04/25/millennials-…

JT

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Ah, here’s a couple;

http://www.advisorperspectives.com/commentaries/2016/10/04/j…

http://www.valuewalk.com/2016/12/new-home-millennials/

http://www.marketwatch.com/story/home-builder-sentiment-soar…

http://www.advisorperspectives.com/commentaries/2016/09/07/u…

JT

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Here’s a quick piece on population changes of the various generations in the years ahead.

Millennials have surpassed Baby Boomers as the nation’s largest living generation, according to population estimates released this month by the U.S. Census Bureau. Millennials, whom we define as those ages 18-34 in 2015, now number 75.4 million, surpassing the 74.9 million Baby Boomers (ages 51-69). And Generation X (ages 35-50 in 2015) is projected to pass the Boomers in population by 2028…

http://www.pewresearch.org/fact-tank/2016/04/25/millennials-…

JT,

Quick note on Millennials,

Having babies before 30 is considered young.

Most people start really considering a home after a rug rat or two or on the ground.

This puts the median shopping age between 30 and 35.

I would be somewhat bullish on LGIH.

Also, people who bought houses in the 60’s and payed the outrages interest rates of 6 percent, they were thought of as crazy. Turned out they did good.

Cheers
Qazulight

2 Likes

After reading a few of the concerns in this thread I put some thought into my current “gut feeling”.

Interest rates are going up. To me not much of an issue. They are going up slowly, and still at pretty close to historic lows.
Home prices are rising faster than GDP, is this sustainable? What effect will it have? To me, this one is a “wait and see”. It could play more into LGIH hands as their target is first time buyers. Actually may push more people into their target market.
Same could be said for increasing rent.
Also some mention of millenials and if/when they will be home buyers. Again - I don’t think anyone really knows, but I feel most research is showing they are reaching the age where they are becoming homebuyers, it is just a little later in life than previous generations.

When I step back and look big picture, I (we) can monitor how the business is performing a lot easier and more accurate than trying to predict all the other potential things that may affect positive or negative down the road. I am pretty comfortable with my position, and adding a bit here and there. When these outside factors start to affect the business, I can adjust accordingly. For now, I plan to slowly build a bigger position and enjoy the ride while monitoring the stuff we can.

Kevin

4 Likes

So here is my question. I’ve heard talk that millennials are not going to be home buyers.

As a couple others have pointed out, I don’t think this will turn out to be true. They may not be now, but as they marry, and especially after they have kids, they will become home buyers, whether they think they will now, or not.

On interest rates, if someone wants a house, you buy the house you can afford at whatever the interest rate currently is. My wife and I bought our first condo in 1990 and had a 10.625% interest rate loan, it was the only option, we bought what we could, at that time, with that rate, because we wanted our own place.

Regarding prices going up and “pricing people out”, if prices continue to go up and people at the bottom of being able to afford a starter home can no longer afford it, people that were at the lower end of the move up bracket will fall back into the lower bracket. High home prices don’t make people stop buying homes, if anything, it becomes more urgent (look back to the housing bubble in '07, nobody stopped buying homes because of high prices). Also, since rents continue to move up, LGIH’s sales pitch will make sense to more and more people.

A long way of saying I’m happily holding my shares I’ve been accumulating.

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“(look back to the housing bubble in '07, nobody stopped buying homes because of high prices)”

People kept buying homes because the banks and mortgage companies attempted to keep the whole bubble going by giving mortgages to anyone with a pulse.
Maybe the biggest Ponzi scheme in US history.

Chris

People kept buying homes because the banks and mortgage companies attempted to keep the whole bubble going by giving mortgages to anyone with a pulse.

Agree with you 100%, Chris!

But don’t think we won’t find a way to do it all over again…I just hope I recognize it this time before most others.