Here’s Why The Housing Boom Could Last For Quite A While…
Stocks have roared back from their 2020 lows. And in case you haven’t noticed, so have home prices.
In the past year, the S&P/Case-Shiller U.S. National Home Price Index, a broad measure of home prices, is up 13.2%. This is the fastest increase since the housing bubble in the mid-2000s.
Source: Federal Reserve
It makes sense to consider if the current housing market is also a bubble. I don’t believe it is. It’s likely that demand for homes will increase, and that is bullish for prices. One way to measure demand for homes is by examining demographic trends. This can be done with a population pyramid, as shown in the next chart.
Notice that there is a bulge in the “25-29” and “30-34” groups. These are individuals who are beginning their careers and possibly living in apartments that are getting crowded. These are potential home buyers over the next five to 10 years.
This is different from the demographics we saw in 2005 when the bubble was at its end. Back then, home prices peaked as we got closer to the burst. At that time, there was a smaller percentage of individuals in the age group where they form new households.
The main conclusion that we can draw from this is that demand is stronger today than it was in 2005, while supply is tighter than it was then. To visualize supply, we can look at the construction activity, specifically the number of new homes builders have started.
In 2005, nearly 1.8 million new homes were started. Now, less than 1.1 million homes are being built.
Source: Federal Reserve
This is less than the number of homes that were built a year in the 1980s and 1990s. And back then, there were about 95 million households. Now there are about 121 million. That means there are more households competing for the available homes, and construction hasn’t kept up with household formation over the past decade.
How I’m Trading This Right Now
This is a formula for long-term gains in the housing market. I don’t expect the gains to be steady, however. But the trend is undeniably up, and that is good news for homeowners and homebuilders.
It’s also good for LGI Homes, Inc. (Nasdaq: LGIH) — which is why I recently recommended a trade on it over at Income Trader.
LGI Homes is the 10th largest homebuilder in the country based on the number of closings reported in the past 12 months. The company has developments in 35 markets across 19 states. The company owns about 38,500 lots, enough to build on for at least three years based on its current pace of construction. LGI Homes also has options on another 30,000 lots that allow for rapid expansion of its portfolio.
LGI Homes’ business model is ideal for the current environment. The company builds its homes on spec, eliminating potential changes to the construction process from owners with contracts. Spec homes are built on speculation and sold as is when they are finished. This allows for efficient construction and completion in 80 to 105 calendar days as crews move from lot to lot in a development.
In the most recent 12 months, the average selling price of a house from LGI Homes was about $260,000, which means they’re affordable for the young demographic seeking first-time homes. On average, the company reported a 14.5% net profit margin on its new homes.
Analysts expect earnings per share (EPS) of more than $15 this year and EPS growth averaging more than 15% a year over the next few years. Using a price-to-earnings (P/E) ratio of 15 and flat earnings, a conservative valuation of the stock is $225 — about 23% higher than the stock’s current prices.
That makes LGIH attractive for the long run. In the short run, the stock is on an Income Trader Volatility (ITV) “buy” signal, as shown in the bottom panel of the chart above.
So while investors may want to look into LGIH as a portfolio candidate, my Income Trader followers and I will use our “P.I.N.” code strategy to make immediate income from the stock. And since our success rate with making trades like this is over 90%, we can feel confident in repeating a similar trade on LGIH again and again…