Stop! Don't Rent a Home

Source: LGI Homes.

LGI Homes (NASDAQ: LGIH  )  is trying to change the game and turn renters into homeowners.

Based in The Woodlands, Texas, this homebuilder had a remarkable one-month run since its November 8th IPO, in contrast with some laggard homebuilders that debuted in the market prior to it this year.  

Presence in the right markets
Since its debut, LGI shares have risen nearly 28%. And indications are strong that these initial gains are sustainable, with the builder looking primed for growth for the long term. With its strategic focus on entry-level homes and targeting renters, the company appears poised to deliver continuing positive results from its main sales territories: Texas, Arizona, Florida, and Georgia. According to a recent analysis by Trulia, buying a home comes out cheaper than renting in these states. For instance, in Dallas and Fort Worth, where LGI Homes has seven communities, Trulia estimates that it would be 34% and 32% cheaper, respectively, to buy a residence.

This computation assumes that the buyer gets a 30-year fixed-rate loan at 6%, falls under a 25% income tax bracket based on itemized deductions, and intends to stay in the home for seven years. A similar situation in favor of buying over renting a home was observed in LGI's other markets.

A quick look at pricing
A rough comparison based on their respective published prices also indicate that LGI Homes can successfully raid the rental turfs of the Blackstone Group (NYSE: BX  ) and American Homes 4 Rent (NYSE: AMH  ) . In Orlando, Fla., one of the metro areas where Blackstone went on a home acquisition binge this year for rental purposes, the company's Invitation Homes unit is renting out a three-bedroom, two-bath residence for $1,793 monthly.

American Homes 4 Rent's rate for an Orlando home with a similar floor plan is quoted at $1,500 per month.In comparison, LGI Homes is offering new homes in Orlando with three bedrooms and two baths at a $959 per-month price point to prospective buyers.

Rising home demand
The tight home market inventories in Texas, where the builder operates in five cities, further bolster LGI's prospects. Home inventory in Texas as of the 2013 third quarter was at a historic low of four months. This level represents a 28% decline from last year's 5.5 months; 6.5-months' supply is the industry benchmark for a balance of supply and demand in the home market. 

In Florida, where LGI is building in Tampa and Orlando, the inventory of residential properties is also below this benchmark as of October. For single-family homes, there was an estimated 5.5 months' supply, while 5.6 months' supply was the estimate for townhouses and condos.

Foolish recap
Wrapping it up, buy-and-hold investors may find LGI Homes' current valuation attractive. It is currently trading about 14 times forward one-year earnings and appears headed toward sustaining improvements in revenues and earnings. These rose year over year by 131% and 116%, respectively, in the company's most recent quarter.

In addition to the favorable factors cited above, the foreseen gains in employment in LGI's core markets provide impetus for future demand for the builder's entry-level homes. A strong driver to household formation and first-time home buyers, job growth is expected to be strong in the next five years in LGI's main markets: Arizona, Texas, Florida, and Georgia.

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