Re LGIH and location: I don't get it!

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Just so people don’t get carried away, in real estate it’s about location, location, location. National sales figures don’t mean much. An investor will want to look at the local markets. For LGIH, look at the local market (down to the specific neighborhood or development) in which LGIH sells.

Hi Chris, I don’t get it. At every bit of good news for LGIH you have a negative counterpoint. But all the news has been good:

We’ve had it pointed out by the major wallboard company that Texas has been very busy selling houses in January (in spite of the oil bust),

We’ve learned that Texas had the 2nd highest job creations in 2015 (in spite of the oil bust),

We’ve learned that LGIH specifically had a 45% increase in closings last quarter (in spite of the oil bust),

And at higher prices,

And that their revenue was up 65% in the first nine months,

And that their earnings were up 77%,

And that they had record closings in January, up 51% from the year before,

Those are extraordinary percentages!

And they predicted closings up at least 20% for all of 2016,

And we know that they are at just ten times earnings,

And now we get confirmatory evidence from Bloomberg that national housing sales were up to almost record post-Recession levels in January, and growing, and your response is another warning?

About location? Seriously?

I have to admit that I am no expert on the housing market at all, but this doesn’t sound like location is a problem for them, or that we need to inspect the exact neighborhoods where they have their developments.

That doesn’t mean they can’t stumble in the future, even stumble badly, but things sure look awfully good for them at present, and at an incredibly cheap price.

JMO .

Best,

Saul

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And now we get confirmatory evidence from Bloomberg that national housing sales were up to almost record post-Recession levels in January, and growing, and your response is another warning?

About location? Seriously?

Saul,

I was not issuing any warning. I was pointing out that national real estate numbers are pretty much meaningless to specific real estate markets. In real estate, markets are always local and that’s what’s important. To take national number and to try to apply that specifically to LGIH can be misleading. It’s like saying that the average temperature in the United States is 70 degrees and using that information to decide what the wear today in Saint Louis.

What I was saying is that an investor should do is to look at the local markets in which LGIH sells homes. And Texas is by no means local; Texas is an enormous place and LGIH sells only in small pockets within Texas. Looking at specific metro areas where LGIH sells is much better. And looking at specific neighborhoods within metro areas is even better. Look at supply and demand factors in those specific markets. Looking at national averages tells one very little and probably nothing.

Regarding LGIH’s past performance, it is impressive. The question is whether how it will continue. Looking at local markets will provide much of that indication. Interest rates (which are usually national, local employment figures, local vacancy rates, local housing supply, and other local factors is what people should be looking at. Not national and not even state (Texas) numbers.

That was the point of my post. That’s all. Saul, I got the impression in your response to my post that you felt a need to defend a stock/company in which you are invested. I really didn’t bring up a “negative counterpoint”. In fact, it wasn’t even a counterpoint and it wasn’t even necessarily negative. It was merely a point that national numbers don’t tell you much (whether good or bad) in real estate. That’s it. Get it?

Chris

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I’m not sure how big the Houston market is for LGIH, but the following article from Calculated Risk (one of the best economic blogs out there - especially related to real estate) gave a not so cheery outlook for the Houston housing market:

http://www.calculatedriskblog.com/2015/12/lawler-yes-houston…

Outlook

Houston’s economy has not yet fully adjusted to the decline in oil prices, and especially the slide in the past few months. There is a pretty good chance that Houston will see negative employment growth next year, along with a rise in its unemployment rate to above 6%. This environment, combined with the lack of any meaningful reduction in housing production to date, suggests that (1) housing production in the Houston MSA should decline significantly next year; and (2) overall home prices should fall as well.

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Saul,

Thanks for your comments and analysis of LGIH.

Frank

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