An excellent read posted by Mr. Starrob on another board;
…The idea of a home that belongs to you, one where you build memories, is still something that most Americans desire when they reach adulthood.
Today, the largest generation in American history has reached this point of adulthood. They’re ready for their own homes.
And as a result, something shocking is about to happen to the economy and the stock market.
This group of Americans — between the ages of 18 and 34 — is the millennial generation.
Born between 1982 and 2000, they came of age in the new millennium.
Millennials are the largest generation in American history, at 92 million strong.
The oldest of the millennials are now 34 years old, which is significant because that’s about the time, based on past data, that Americans begin to buy homes, buy cars and have kids…
Also mentions iShares U.S. Home Construction ETF (NYSE Arca: ITB) as another way to ride the wave.
The homebuilders are in a sweet spot right now.
Low interest rates.
High demand.
Low supply. They are leery of over building repeating mistakes of the recent past.
Then there are those who think the threat of rising rates will depress home builder stocks. LGIH does have a high short interest, perhaps because of it’s higher than average price to book value.
October 28, 2016
"Real estate and homebuilding stocks have been losing ground since August, with market players dumping positions ahead of an expected December rate hike that should raise borrowing costs. While a series of small hikes may have a limited impact on home sales and commercial construction, few folks are willing to bet on that outcome in the eighth year of an economic expansion, raising the odds the group is headed into a secular downturn.
The declines are setting up potential short selling opportunities, which would gain additional steam under a Trump presidency due to an expected shortage of skilled builders, driven by crackdowns on illegal immigrants. Short positions could also work well in a Clinton administration, with Fed Chairperson Janet Yellen likely to get a vote of confidence…"
LGIH does have a high short interest, perhaps because of it’s higher than average price to book value.
On the other hand, they have a PE of 10.05 with trailing earnings up by 47%. That may account for their higher than average price to book value. It’s hard to see how a rate hike will suddenly make them expensive.
This fact, of delayed and pent up economic maturity in a group larger than baby boomers is an enormously important macroeconomic fact. It bodes well for future economic growth moving forward. Not just in housing but through the entire economy. Millenials will have the same economic desires as all recent American generations have had, but theirs have been largely delayed.
It is a very positive demographic trend for longer term economic growth if we don’t do something stupid to stifle it.
From my personal experience, I don’t think a rate hike will have much impact on LGIH. I bought my first home in Seattle in 1979. I signed a 10.5% mortgage. I was aware that this was an historically high rate. I didn’t care. I had the down and I qualified. I wanted to get out of paying rent. Even in the days of stagflation (look it up if you’re too young to know what it was) housing (in Seattle anyway) was still steadily climbing, and so were rents.
I think LGIH is in a sweet spot with their appeal to 1st time home buyers. At first I didn’t see this as a moat, why can’t a 100 builders emulate them, I guess it’s not so easy. For one, they provide their own brokerage services (perfectly legal), their homes do not show up in the MLS. So they avoid brokerage commissions. I assume their sales staff and brokerage office is on salary rather commission (probably there’s an annual bonus based on office performance - I don’t know, just a guess). This is not easy to copy, especially if your an established builder with independent broker relations at the heart of your sales strategy. How do you continue to build and sell houses including existing inventory, while withdrawing from the broker pool and an MLS? You’d take a huge up-front financial hit with no guarantee of future success. Most builders (especially publicly traded ones) can’t afford the risk. What would happen to the stock price after a couple quarters of no or nominal sales at a lower ASP. In the tank, no matter your assurances that it’s all part of your strategy and things will be great . . . next year.
So the Fed raises the rate by 50 basis points in December. What will happen to mortgage rates? Not much. Other factors are more important to long term rates. Yeah, they’ll edge up a little, and push the mortgage qualifications up a bit, so a small percentage of buyers at the bottom of the pool will become excluded. And what percentage of them were potential buyers? Probably not a lot. I think most people buy a house in their comfort zone rather than pushing the threshold of what they can afford.
I think LGIH is in a sweet spot with their appeal to 1st time home buyers. At first I didn’t see this as a moat, why can’t a 100 builders emulate them, I guess it’s not so easy. For one, they provide their own brokerage services (perfectly legal), their homes do not show up in the MLS. So they avoid brokerage commissions.
Really a nice post Brittlerock, all the way through. Thanks.
Saul