In November, new home sales increased 17% year over year to a seasonally adjusted annual rate of 719,000 units, according to a Census Bureau report out just before Christmas. This is the strongest home-selling pace in over 12 years. After a decade of sputtering and false starts, things are looking up for the entire homebuilding sector.
A shortage of supply creates an opportunity
There is currently a deep supply/demand imbalance with respect to the U.S. housing market. The latest National Association of Realtors Existing Home Sales report showed that inventory was 1.64 million units, which represents only a 3.7-month supply at the current annual sales rate of 5.35 million units per year. Historically, a balanced market (where supply and demand are matched) would have about 6 months' worth of homes available for sale. Why is there such a shortage with the U.S. housing supply?
One of the biggest reasons is post-asset bubble psychology. After asset bubbles (especially residential real estate bubbles) the losses affect almost all major stakeholders (buyers, sellers, lenders, and regulators) of the asset class in question. Buyers are reluctant to purchase real estate, worrying that it could go down in price. Homebuilders are worried about being stuck with homes they cannot sell, and lenders are reluctant to extend credit to the sector, especially when they are still licking their wounds from losses incurred earlier.
Another major issue for the builders has been a lack of skilled construction labor. Quite simply many of the electricians, plumbers, etc. who were employed during the housing bubble years changed industries as opportunities dried up during the bust. Many found new jobs in the energy sector, which was taking off just as housing was imploding. The labor shortages have been so acute for the construction sector of late that builders have been turning to ex-convicts to help fill jobs.
The company that can find its way past these headwinds to take advantage of the high demand stands to benefit greatly.
A veteran homebuilder adds some 21st-century technology solutions
Lennar is one of the largest homebuilders in the U.S. and is in a great position to be that company. The builder covers all the bases, with offerings for entry-level, move-up, luxury, multi-family, and retirement homes. Starting as a local Miami homebuilder in the mid-1950s, Lennar has grown by acquisition, most recently by merging with CalAtlantic in 2018.
The company does have some unique offerings that help it stand out. Lennar's Everything's Included concept offers what many homebuyers would consider luxury amenities as standard items in the homes it sells through this program. The Next Gen concept in some of its offerings allows for multi-generational living in the same unit.
Lennar has also made some strategic investments in fintech entities to boost its home-selling efforts. One fintech effort is online real estate company Opendoor, which streamlines the homebuying process. Lennar has partnered with OpenDoor for its New Home Trade-Up program. A buyer would choose their Lennar home and then sell their existing home to OpenDoor without the sales hassle of showing the property to potential buyers and/or waiting for a long closing process to run its course. The equity in the existing home would serve as the down payment on the new Lennar home. The industry term for this process is called iBuying. According to Redfin, iBuying has become popular with both Zillow and OpenDoor and recently accounted for more than 10% of all home sales in several early adopter cities. You can find out more about iBuying here: Zillow plans to do to Real Estate what Amazon did to retailing.
Lennar found another fintech asset when it partnered with mortgage tech start-up Blend, which offers a digital mortgage solution. Many mortgage bankers, most notably Quicken Loans, offer the ability to apply for a mortgage directly from a phone or tablet without much of the cumbersome paperwork traditionally associated with the process. Blend is a privately held competitor to Quicken whose software uses what a home buyer's financial institution already knows about the potential borrower's income and assets to quickly calculate how big a loan the applicant could afford. Lennar has partnered with Blend to offer digital mortgages to its customers.
How can an investor take advantage?
If there is such a shortage of available homes, how can an investor play it? The easiest way is probably via the S&P Homebuilder ETF, but that ETF also contains some less direct investments, such as home improvement retailers.
A direct investment in Lennar would be another way to play the situation. Lennar is scheduled to report its full-year earnings on Jan. 8. Wall Street analysts expect revenues of $21.9 billion and earnings per share of $5.53. With the stock trading around $56 per share, that puts Lennar's P/E ratio at just over 10, which is below the sector average of 13. Lennar is priced below the sector mean, yet has some potential upside through its recent efforts to boost its fintech associations. Its stakes in OpenDoor and Blend give the stock some upside if either company takes off.
Basically, Lennar is trading at a discount to its peers and is entering what should be a long multi-year boom in homebuilding which should be a rising tide that lifts all boats. It is rare to get high growth sizzle in the context of a value stock, but Lennar provides that.