LGIH and 2016 Home Sales

Oversimplification is a common problem in markets, with people making lots of assumptions about how one isolated data point impacts companies. I’ve even see company A fall when company B reported poor earnings as a direct result of company A eating their lunch! But people sometimes just sell off the whole industry when they hear bad news from any participant without ever looking behind the numbers and trying to understand what might actually be going on. Increased popularity of ETFs certainly doesn’t help.

As a home builder, LGIH will undoubtedly be subject to swings based on housing data (and oil data, as we’ve seen, due to their Texas exposure). One of the things we may see in 2016 is softening home sales, and it wouldn’t surprise me if LGIH occasionally drops on news like that. But, importantly, one big reason we might see softening home sales is because of low inventories. Here’s a blurb from Bill McBride:

As I’ve noted before, there are some economic reasons to expect some softness in existing home sales in 2016. Low inventory is probably holding down sales in many areas…


It doesn’t matter if aggregate home sales soften as long as LGIH has no problem selling their homes at solid prices, and low inventories should help them do that. Each geographic area is different, of course, and I don’t know what inventories will be like in the specific areas where LGIH sells homes. McBride also goes on to say that housing sales may slump in oil-impacted areas, further impacting overall sales – I think the jury is still out on whether low oil will have a meaningful impact on LGIH directly, but so far we haven’t seen any evidence of that. Time will tell (and oil won’t remain low forever).




Valid point.

My problem with home builders, is I do not see the ability to scale. Each home they sell has a lot of effort involved. The building plans may stay the same, but the cities, the land, the employees often change. So you begin anew on each project. I believe Texas is easier, but CA planning departments are really slow and costly. In my city the permits alone cost over $100,000 per home, no wonder houses cost so much in Silicon Valley.

Contrast that with a product that is most intellectual property, software, once you build it the costs of selling it to a second person is close to zero.

I hope this turns out to be a great investment for those who own it,

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