The Best Sector to Buy as Stocks Climb
They told me I was crazy.
From the start of the COVID-19 crisis back in 2020, I’ve had my eye on the housing construction sector.
In several of my weekly YouTube videos over the last few years, I’ve argued this sector offers some of the deepest value in the market.
Shares have been irrationally undervalued since as far back as April 2020.
Readers thought I’d lost it!
They pointed out that economic activity was down during the pandemic … people were losing income … real estate agents couldn’t transact while whole countries were under lockdown.
That was true for a few short months, and then, to their surprise, the sector boomed. And it’s been going great guns ever since.
Yet the fact remains that you can still make a ton of money in housing.
Let me explain how…
Not All Real Estate Is Created Equal
Investors often struggle to understand the housing sector. That’s because “the housing sector” can mean different things to different people.
For most of us over the age of 50, “housing” means a free-standing single-family home. When we think about “the housing sector,” we think about real estate agents and colored balloons tied to “for sale” signs on Sundays.
From that perspective, housing doesn’t look so good.
Aging homeowners are staying put. So, sales of single-family homes have stagnated at around 5.4 million units a year for most of the last decade. That’s down from a peak of around 7 million before the financial crisis.
By contrast, annual sales of multifamily housing — often called “affordable” housing — rocketed from around 50,000 units in 2011 to nearly 300,000 units a few years ago. Issuance of multifamily building permits averaged around 475,000 units in recent years.
In Atlanta, there’s been an explosion of construction. Encouraged by local authorities keen to broaden their tax base, developers have scooped up land near transport corridors and built tens of thousands of condos and apartments.
And even that’s not enough. The supply of both free-standing and multifamily housing has lagged far behind potential demand, despite low interest rates.
It’s true that affordability has been a major problem. In the fastest-growing urban areas, restrictive zoning laws have kept land prices far beyond the reach of the average first-time buyer.
But that’s shifting rapidly.
A strong economy, historically low unemployment and interest rates — and above all, effective pushback against restrictive zoning — led to a rapid increase in new construction of multifamily housing.
And it’s precisely that segment of the housing sector — “residential housing construction” — that causes me to be so bullish.
Bank on Affordable Housing (It’s Inevitable)
My bull thesis on housing is simple.
Local governments have dramatically reduced regulatory barriers to affordable multifamily housing construction over the last few years. To encourage new development, they’ve also lowered construction costs by tweaking taxes and bulk utility installation charges.
The result is gathering momentum in the residential construction sector focused on affordable multifamily homes. The target market is younger, salaried middle-class households working in knowledge-based industries like technology, marketing and other occupations that allow for working at home.
For those households, income hasn’t disappeared, so the potential demand for new housing is still there.
And unlike single-family existing home sales, it’s possible to purchase a home before it’s built by using virtual tours and gathering knowledge about the neighborhood.
So, let people who misunderstand the diverse nature of the housing sector ignore it. My advice is to grab shares in the right companies now while they are super cheap. They’re going to bounce back … and they’re going to do so much more sustainably than many other sectors that don’t attract such negative scrutiny.
An easy and profitable way to play this sector is the iShares U.S. Home Construction ETF (BATS: ITB). It holds both major residential construction companies as well as building material suppliers.
Editor, The Bauman Letter