Conditions haven't exactly been ideal for homebuilders recently, with supply chain and labor issues leading to large backlogs for many. However, there are some big tailwinds for the industry that could make 2022 and the next few years a great environment. In this Fool Live video clip, recorded on Jan. 7, Fool.com contributor Jason Hall explains to colleague Matt Frankel why he's very interested in homebuilder stocks right now and what his top picks are.
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Jason Hall: I'm going to make the case for homebuilders. I'm going to use some charts, and then I've got a basket of homebuilders I want to share.
First thing, if you were to look at this chart and you were to see purple, the purple which is existing home sales, and the yellow, which is housing starts, and you see back here this is the global financial crisis, the big peak and then the crash. Then you see where things are now. You might have concerns. Are we going to end up back here again? Are we building too many houses? Are we selling too many houses and we're going to be in a mess? I think that's absolutely not the case because I'm going to pull the sales number off, and I'm going to stretch this one out.
We have spent the better part of a decade under-building. We're only now getting back to a healthy level of housing stats, after years and years of under-building. Depending on who you ask and the data you look at, we could double the number of homebuilders in the U.S. for three to five years and basically just catch up. This is being heavily exacerbated by this piece of data right here: home inventory, homes for sale. A big part of the thesis for housing has been that baby boomers were going to sell their big family houses. They were going to move into planned communities, they were going to move into retirement homes, they were going to move into condos. And that hasn't happened. That has not happened by and large. We're seeing a massive amount of retiring-in-place, and there are just not enough houses to buy.
By the way, this thing here has also continued to grow up, and that's the population -- the U.S. population. Birth rate slowing. But immigration is going to start recovering at some point after everything that's going on with the coronavirus crisis is affected immigration. The bottom line is that we just do not have anything like enough housing. I'm going to make the case that investors right now would do very well to buy a basket of homebuilders. The five that I'm going to recommend in that basket are Dream Finders Homes (NASDAQ: DFH), ticker D-F-H; Green Brick Partners (NYSE: GRBK), ticker G-R-B-K; LGI Homes (NASDAQ: LGIH), ticker L-G-I-H; Meritage Homes (NYSE: MTH), ticker M-T-H; and NVR (NYSE: NVR), ticker N-V-R.
No. 1, you look at their forward price-to-earnings (P/E) ratio. You can look backwards, too, with their P/E ratio. We're talking for the most part, single-digits P/E ratios versus a market that trades for 20, 25 times forward earnings. Even NVR, which has historically always traded for premium valuations, still is at a significant discount to the market. Now, the bottom line is that there's risk with homebuilders because they do spend a lot of money and take on a lot of debt to acquire land that they sit on for multiple years while they get ready to develop it, and then they develop it and then they sell their homes.
But again, the case is we are so short of inventory, there is so much pent-up demand. We talked about with Howard Hughes (NYSE: HHC), what they're doing with these master-plan communities. Simply to create enough infrastructure for homebuilders to build houses that there's massive pent-up demand for. I think investors that buy this basket of homebuilders can do incredibly well.
I want to hit on a couple of other points real quickly in the next minute or so. That's that if you think about Green Brick Partners, LGI Homes, Meritage specifically, those three are very focused on entry-level housing. Dream Finders to a lesser degree, and NVR has a more balanced portfolio of homes. But the largest section, the largest cohort of housing that has been underserved over the past 10 years, is entry-level housing.
Homebuilders were building custom homes, they were building move-up homes when we were coming out of the global financial crisis. Because there was nobody buying entry-level homes. Just they weren't. People that would normally buying entry-level homes were still struggling to find jobs. They were still in university because there were no job opportunities, and they were trying to improve their education to have better employment opportunities.
That situation is completely flipped, and we have millennials, the largest cohorts in the country, that are now aggressively moving into buying homes, and there is a massive amount of unavailable homing. There's just a massive inventory shortage. I'm a big believer in these companies. I think with Dream Finder Homes and NVR, you add something really interesting to the strategy: That not only do they really focus on using less debt to buy land -- they use more options to line it up -- but they also are involved in more of setting up the financing and the whole process. A little more vertical integration with those. That these five and a basket I think is a great way to go, so we'll wrap it at that.
Matt Frankel: Yeah. Out of those, my favorite is Dream Finders. I love NVR, I had Dream Finders' CEO on the show, I think two weeks ago. He said he modeled the business after NVR. It's like investing in NVR, which has been one of the best-returning stocks anywhere in the market over the past couple of decades. It's like investing in them 10, 15 years ago.
Hall: Yeah. I agree. It's really interesting. The next decade is going to be great for homebuilders. That's my thesis.
Jason Hall owns Dream Finders Homes, Inc., Green Brick Partners, LGI Homes, Meritage Homes, and NVR. Matthew Frankel, CFP® owns Dream Finders Homes, Inc. and The Howard Hughes Corporation. The Motley Fool owns and recommends Dream Finders Homes, Inc., Green Brick Partners, LGI Homes, and The Howard Hughes Corporation. The Motley Fool recommends Meritage Homes and NVR. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.