These Five Companies Could Profit from the New Housing Crisis
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One of the most shocking pieces of news to hit my desk recently is that millennials are finally starting to think about that whole getting married, having a family, and building a home thing.
In other words, it seems millennials are no longer acting like millennials.
According to the National Association of Realtors, millennials are now the most significant share of homebuyers, at 36%. The association also noted that 65% of these buyers were also first-time homebuyers.
With the memory of the agony their parents faced during the 2008/2009 financial crisis and housing meltdown, millennials were clearly slow to get into the home-buying game. Now, it seems they’re not only participating but jumping in feet-first.
But they may be arriving a little late to the party.
In other words, they’re entering the market at a time when a new supply crisis – exacerbated by the U.S. Federal Reserve’s extreme enthusiasm for rate hikes – could make finding a home nearly impossible…
And it’s a crisis that could lead five companies on my radar to stream us steady, long-term profits…
Millennial Homebuyers Are About to Enter Their Worst Nightmare
It’s no secret that the Fed is talking about raising rates at a measured pace through 2018 and 2019, but some analysts suggest that pace could be much more frantic than expected.
Henry McVey, a macroeconomist over at KKR & Co. LP (NYSE: KKR) who’s been pretty accurate over the past few years, thinks we’ll see six more rate hikes in 2018 and 2019. Guggenheim Partners predicts a whopping seven rate hikes, which would put the federal funds rate at 3.50% by the end of 2019.
If mortgage rates maintain the same relationship they have with the fed funds rate right now, a 30-year mortgage would be over 6%.
Think about that: it would add about $300 a month to a $300,000 mortgage, possibly putting the cost of a house far out of range for millennial buyers, especially those fresh out of college AND entering the workforce.
Now, this may come as a surprise to some of you, but most homebuilders aren’t in that business to give everyone their dream home and make them happy. They’re in it to make money, and they’re in it to make as much as possible on every house built.
And homebuilders just don’t make as much profit building lower-end homes. Not to mention the fact that the prices of lumber, copper, and plastic resins all rising this year has increased the cost of building a house even as demand is also pushing prices higher.
So as you can see, there’s a severe supply-demand situation developing that’s having a very negative impact on housing affordability. We just don’t have enough houses to meet current demand, and you can see this dilemma boiling over in every recent piece of data out there.
Just look at housing inventories, currently at less than half the credit-crisis peak and right around 2006 levels, with about 5.5 months of supply. Housing starts are back at about 1993 levels, and a relatively small percentage of those are in the less-profitable starter homes.
All of this needs to change, and change soon, or we will have an affordability crisis in the United States.
I can hear you thinking, “Fascinating stuff, Tim. I’ll call my kids and tell them to get off their lazy asses and buy that house before rates and demand make it impossible.”
But what I thought when I saw this crisis coming a mile away was, “How can this make you money?”
That’s why I did some digging and found five companies trading at undervalued levels that are set to rally from this housing-supply crisis looming on the horizon…
The Housing Market’s Pain Could Send These 5 Companies Soaring
I see two lucrative scenarios for aggressive long-term investors looking to benefit from the housing market’s supply-demand imbalance.
First, when there is excess demand in a market, it’s usually a pretty good idea to help meet that demand. That would make homebuilders the obvious investment target, as they will all make millions racing to build as many houses as possible.
But I checked the list of homebuilders, and none of them fit into my methodology of unreasonable undervaluation at the moment. I also checked with the research team that puts together the Money Morning Stock VQScore™ data, and they didn’t have any builders in the “Buy Zone” at the moment either.
What I did come across, instead of homebuilders, were several building material suppliers that boast substantial long-term potential.
They include Global Brass and Copper Holdings Inc. (NYSE: BRSS) and Weyerhaeuser Co. (NYSE: WY). Weyerhaeuser is a real estate investment trust (REIT) that’s one of the largest owners of timberlands on the planet. It owns more than 13 million acres of timberland in the United States, a massive portfolio that ensures long-lasting demand from homebuilding companies.
Meanwhile, Global Brass sells sheets, alloys, aluminum, steel, and other components essential for home building, making it a ripe pick-and-shovel play poised for higher profits as builders scramble to meet demand. Plus, Global Brass boasts a top VQScore of 4, confirming its profit potential.
The second scenario involves one simple question: Where the hell did all of those houses go?
The answer is that, in the aftermath of the credit crisis, institutional investors like hedge funds bought up millions of single-family homes and turned them into rentals. That, of course, turned out to be an excellent move as the housing market recovered and the profitability of those properties rose significantly.
The hedge fund activity also led to increased consolidation among single-family rental REITs, leaving just five left as of May.
The only three I would consider buying as long-term holds are Invitation Homes Inc. (NYSE: INVH), American Homes 4 Rent (NYSE: AMH), and Reven Housing REIT Inc. (Nasdaq: RVEN). These three trade far below the value of the assets they own, meaning they will eventually rise up to the fair value of their real-estate-as-homebuilding picks to meet current demand.
Specifically, I see several potential profit outcomes for these three REITs…
First, another company notices the supply-demand opportunity and buys the REITs outright.
That’s the least likely outcome for Invitation Homes, since the $11 billion company is still owned by private-equity giant Blackstone Group LP (NYSE: BX). A takeover is certainly possible for American Homes, and I’m actually shocked no one has scooped up Reven. Its current discount makes its portfolio of southern homes across Alabama, Florida, Georgia, Mississippi, Tennessee, and Texas all the more attractive.
Second, American and Invitation start selling the homes they purchased post-financial crisis if millennial demand keeps growing over the next few years.
That’s the likely scenario, so long as the Fed keeps itself from going crazy over rate hikes. It would be something of a self-liquidation strategy, and the total sales would be far more than current share prices in both cases.
And the third outcome would be that all three do nothing.
It will take years for the homebuilders to meet the growing demand of millennial buyers, particularly first-time buyers. No one is motivated to build low-end houses right now, and it will take even longer to meet that demand.
In the meantime, new millennial parents are looking to leave the urban core in search of quiet streets and safer schools, so the rental market in suburban communities is poised to stay strong. Not to mention, dividend payouts will grow as property values and rents keep rising.
Single-family homes are in short supply. If Economics 101 has taught us anything, it’s that it probably makes sense to own something in short supply and high demand.
