My “Backdoor” High-Yield Housing Pick Is Up 130% — And It’s Still A “Buy”
These are crazy times for anyone actively trying to buy or sell a home. You may have heard stories about hordes of eager buyers racing to newly-listed properties and offering thousands (often tens of thousands) of dollars above asking price.
While some cities (like Phoenix, AZ and Tampa, FL) have been hotter than others, just about every major metro market is seeing frenzied bidding wars as desperate buyers compete for limited inventory. My family has been house hunting for six months with no luck. We’ve made several premium offers on properties that caught our eye, but there has always been an overzealous bidder willing to pay even more.
It’s not uncommon for a newly-listed home to attract as many as a dozen offers within the first 48 hours. We’ve been on the short end of this frustrating process multiple times. Yet, that’s still better than overpaying. We loved the wrap-around deck and lakefront view at one house. Another had a killer game room. But I refuse to pay $1.20 or $1.30 for a dollar’s worth of assets.
Ever the value investor, right?
A Chronic Shortage Of Housing
For reasons that we don’t need to delve into today, there is a chronic shortage of available homes. In fact, the National Association of Realtors reports that the supply of available pre-owned homes for sale plunged 29.5% in January versus a year ago — the sharpest decline ever recorded.
This time of year, there might normally be 1.5 million homes for sale on Zillow and Realtor.com. But we are well below that level right now, with just 910,000 active listings through last month. Closed sales are running at a monthly pace of 518,000 (6.2 million annually). At this rate, the entire supply would be exhausted in less than two months, a record low.
Source: Federal Reserve Bank of St. Louis
For context, a six-month supply is considered healthy.
No wonder the average home is only staying on the market for just 19 days. And we all know what tight supply/demand conditions mean. The imbalance has driven average home prices nearly 20% higher over the past year — with the median existing home value rising briskly to $346,000.
We’re Already Profiting From This Crazy Housing Market
As I mentioned above, roughly 6 million homes will change hands this year – not counting new construction. And just about all of these transactions will involve title insurance.
Title insurance helps indemnify buyers and lenders (up to the value of the property or loan) in the event of a real estate dispute. This is one of those miscellaneous closing cost fees tacked on to the bottom of your mortgage loan. But they add up.
Fidelity National Financial (NYSE: FNF) is the No. 1 provider of title insurance and escrow services, accounting for a 33% share of the market. If you’re a homeowner, there’s a one-in-three chance that you did business with FNF or one of its subsidiaries when you closed on your home and signed that stack of settlement documents.
I first recommended FNF to my High-Yield Investing premium subscribers in March 2020, the early stages of the pandemic scare. The stock had been cut in half, falling from $40 to $20 in a matter of days. As usual, panicked traders did us a favor. The title insurance business was never really threatened. In fact, with the Fed lowering rates to near zero, lenders were being inundated with mortgage originations and refinancings.
Far from cutting its dividends, FNF had just lifted them to $0.33 per share. And that quarterly payout was comfortably supported by earnings of $0.95 per share. Two years later, business is stronger than ever.
The company just posted a powerful 45% increase in full-year revenues to $15.6 billion, driven by record title insurance volumes. And keep in mind, this lean operation has maintained the highest profit margins in the industry for 20 consecutive years. That helps explain why management was able to $900 million to stockholders last year through dividends and stock buybacks.
FNF has rewarded us with a powerful triple-digit gain, as well as back-to-back double-digit dividend hikes. Along the way, it has also branched out into the annuity business, doubling assets under management (AUM) to $35 billion.
The home is the single biggest asset for many families. And it has been a productive one. A recent study found that the buoyant housing market created $8.2 trillion in wealth between 2010 and 2020 – not counting last year’s appreciation.
Considering the housing market accounts for nearly one-fifth of the nation’s GDP, this upswell has broad ramifications for investors – and not just for the obvious beneficiaries like homebuilders, but those lower down on the food chain as well.
FNF is one way investors can benefit from this booming housing market. We’re still sitting on gains of nearly 130% since adding the stock, but the broad market selloff has sent shares below $50 and the yield up to about 3.75%.
Over at High-Yield Investing, we will likely be exploring more income-producing opportunities in this corner of the market in the weeks and months to come.
For now, remember that the stock market can be just as overzealous as the housing market at times. Be careful not to get carried away as traders auction off shares at prices well above what they’re really worth. Patience can be your ally.
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