Tech stocks have been all the rage in 2020. And for good reason, with the tech sector delivering more than 30% in gains and tech companies providing many of the tools that have kept millions of people working during the coronavirus pandemic.
But investors shouldn't ignore a boring industry like homebuilding; after all, many of those tech companies count on millennials as their most important employees. On the Nov. 6 edition of "The Wrap" on Motley Fool Live, host Jason Hall shared some data that lays out the prospects for the housing industry in stark detail, while Motley Fool and Millionacres contributor Tyler Crowe adds some valuable context. In short, the next decade could be a mega-boom for homebuilders as they work to meet the massive pent-up demand and make up for a lost decade of new home construction.
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Jason Hall: I'm going to do a quick screen share here. This is contextually, I think, it's really helpful to demonstrate what's going on with housing right now. This chart, I don't know if I need to blow this up a little bit. If you guys, could you see that OK?
Deidre Woollard: Yes, I can see it now.
Tyler Crowe: There it is. U.S. housing, my favorite chart.
Hall: This chart is huge. This goes all the way back to 1970. You see that really sharp drop, the big roller coaster or the big hill on the roller coaster there, that was the global financial crisis, that was the housing crisis in 2008.
Then we spent a decade, that big decade of ramp up, when new home construction was well over a million homes. Consistently, new home construction was well over a million a year for a decade, basically. All this inventory was added. Everybody's heard the stories about people with a second-home, with two mortgages on the second home, and then a third home with three mortgages on it, and they were all zero interest balloon notes that were after 10 years were going to come due.
Anyway, that's what happened, is we had all this inventory and home builders stopped building houses. Look, it dropped to half a million houses a year. That didn't even meet up with replacement of lost properties. We were actually every year for, I think it was like maybe four years, at least three years there. The United States ended each year with less home inventory than it started with. It was that bad.
Then when they started building again, in 2012 or so, they weren't building entry-level homes. Because guess what? You remember that whole millennials are living in their parents' basements, all that stuff. Yeah, that's the story, so home builders spent seven or eight years gradually increasing how many homes they were building every year.
But they were still building custom homes. They weren't building affordable entry-level housing, and that really didn't start until a few years ago when you saw, I think Meritage Homes was the first top 10 home builder that announced, "We're making entry-level our focus," and they started shifting all of their land buying to like 70%, 80% of their new land, was lots they were going to develop entry-level housing. Now, that makes up almost all of their business. LGI Homes, since they started, that's been their entire business.
The point is, you look at that big long tail chart, and we're just now getting to the point of where new home construction (is back to where it) has averaged over the past 50 years, and there's a hell of a lot more Americans now than there were back in 1970. To Tyler's earlier point, there's a lot of old houses out there. So it's just the dynamics if you think about with where the housing market is. The point of this is, yes, it's cyclical. We're going to see these ups and downs, these peaks and valleys from quarter-to-quarter and even year-to-year.
But there's still a massive amount of unmet demand, pent up demand and minimal inventory to meet that demand. I'm going to get out of the screen share here. Go ahead, Tyler.
Crowe: I was going to say that chart also is a great indication of when we talk about this year. Oh my, God. Housing has just been incredible. Are we ever going to see something like this again? Go back and look at that chart. New housing stats of 1.4 million. For the past 50 years was at, excluding this decade, was a down year. That was not a great new housing starts kind of weak that you'd be typically seeing in the United States.
Hall: I'm sharing it again here and I'm adding a little context, US population.
Crowe: You have this decade-long period of just under-build, and it's really coming to roost now more so than ever. I'm 36 years old. I'm considered the first wave, or the oldest wave of the millennial generation, which is the largest population demographic in America.
Hall: Tyler, I think we call you oldlennials.
Crowe: (Laughs) That actually sounds very appropriate for me. But this age cohort that goes from about 36-37, all the way down into the early 20s. This is the age group that is coming into buying homes now over the next 10 years. It is a large group, there is low inventory. We always talk about low inventory. It's been that way since 2018. Unless we see a massive boom in construction, we're going to be almost perpetually in this low inventory cycle for who knows how long?