The Final Nail in Housing?

The Final Nail in Housing

“Housing is picking up, our furniture stores are running at good gains, as is the carpet business.”

That’s Warren Buffett — the world’s third-richest man and the world’s greatest investor ever.

Buffett’s Berkshire Hathaway company has huge exposure to housing. It owns one of the nation’s largest real estate brokerage companies, a modular housing company, furniture stores, carpet stores and brick-making factories.

Buffett is personally responsible for putting millions of dollars into stocks of companies that benefit from homebuilding, because he sees something big on the horizon for this sector. A new generation is rising up to surpass even the baby boomers and they want the American Dream…

Homebuilders are poised to enjoy impressive strength as they benefit from a confluence of factors working together to create a swell in demand for new homes. And it all starts with the next generation of homebuyers.

The Buying Power of the Millennials

So, what’s going on? Well, more and more young people are finally buying houses after putting such a major life moment on hold due to a slow economic recovery and weak jobs market. You can do a quick Google search and you’ll find recently dated blogs that gush about buying homes.

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“WE BOUGHT A HOUSE! Anel and I have been saving our pennies for over five years and finally came to a point where we were ready to bite the bullet.”

“We bought a house. It’s a REAL house with power and closets and counter space and indoor bathrooms and neighbors.”

“So lots of days, paperwork, phone calls, lender meetings, etc. We closed on this house yesterday and we have not been this excited about something in a long time.”

These are testimonials of three young families who have just bought homes, the oldest wave of a generation called millennials.

Born between 1980 and 2000, millennials are estimated to number about 87 million, compared to 76 million for the baby boomers. The oldest of the millennial generation are now in their 30s. And they are beginning to buy homes. Big homes, just like the ones they grew up in suburbia.

According to U.S. government census data, the average home is nearly 2,678 square feet. That’s about 12% bigger than at the peak of the real estate bubble.

Housing - New Single Family Homes

What’s more, millennials have incredibly low interest rates working to their advantage. The 30-year mortgage sits at a 50-year low of 3.75%.

Housing: 30-year fixed rate mortgage average

If you bought a house for $150,000 today, you would be paying about $700 as a mortgage payment at these rates. In fact, mortgage payments in many areas now represent just 15% of salaries. In most urban areas, soaring rents are sucking up as much as 30% of salaries. Buying a house is a good deal when you compare it to renting.

87 Million People House Hunting

But the buying power of millennials isn’t the only thing homebuilders have working in their favor. Commodity prices have crashed. Copper prices are down nearly 60% since peaking in 2011. Lumber prices are down about 50%. Bottom line, the cost of materials to construct a house is low right now.

It’s perfect opportunity … if you’re a homebuilder.

There is growing demand for houses and crazy low material costs. Even if home prices go down a bit, demand for houses is going to keep steadily rising because you have 87 million people who are looking to buy. According to Realtor.com, existing and new home sales are expected to reach 6 million for the first time since 2006.

One more thing: Housing inventory is low. Frank Nothaft, chief economist for CoreLogic, the leading real estate data gathering firm, says: “Many markets have experienced a low inventory of homes for sale along with strong buyer demand.” You can see this in data being tracked by the Federal Reserve … housing inventory is low.

Existing Home Sales Housing Index

The housing sector is facing a supply/demand crunch. There is growing demand and not enough supply. It’s Economics 101. This kind of setup can generate huge gains for you.

Housing: How You Can Benefit

The first wave of millennials is starting to buy houses. You want to get some exposure to the stocks that are going to benefit. Housing stocks aren’t pricing in the sales and earnings that are going to come because of recent market volatility. Same goes for stocks of companies that make building materials.

If my interpretation of the data is right, you’re going to see these stocks soar higher when they start to report their sales and earnings to investors in 2017.

You don’t want to wait too long to get in on this potential boom in homebuilders because sophisticated investors are going to be working this out soon. You want to buy before they do so you get the benefit of them bidding the price of these stocks higher.

Here’s what you need to do if you want to make a targeted, laser-focused bet on housing: Buy the iShares U.S. Home Construction ETF (ITB). This exchange-traded fund (ETF) owns all the big homebuilders such as Lennar and Toll Brothers. It also holds shares of materials suppliers such as Home Depot and Lowe’s, which benefit from increasing home sales. Finally, this ETF also gives you exposure to companies such as paint company Sherwin Williams and furniture company Ethan Allen.

Regards,

Paul Mampilly
Editor, Profits Unlimited