The housing market in the U.S. is on fire, and now that lumber costs are finally starting to come down, it could be a great summer for homebuilders. In this Fool Live video clip, recorded on June 15, Fool.com contributor Jason Hall discusses three homebuilders investors might want to put on their radar.
Jason Hall: What I'm going to do is I'm just going to paint the picture why these three? Because there are some characteristics that they have in common. The first thing is that they're all smaller, particularly Green Brick Partners (GRBK 0.20%), it's the smallest of the three. LGI Homes (LGIH -0.38%) is one of the 10 largest homebuilders in the U.S. but it's on the smaller end. Then you have LGI Homes. The thing that I like about all three of these as a particular characteristic, is where they sit in the homebuilders space. All three are largely focused on entry-level starter properties and there's massive demand. We're basically actually guys, I just tweeted out before the show today. Like if you look at the metrics, we're dealing with gigantic under supply of existing homes for sale. Like the number right now is about half where healthy market is for existing homes for sale. We're coming off basically a decade of under-building new homes. At the same time, millennials are moving into buying homes like in lockstep, it's a massive generational shift a few years older than most generations do it because of coming of age of the global financial crisis. These three builders in particular, are very focused on building entry-level housings, particularly in the Southeast, the Sunbelt, they all operate there. As a matter of fact, the Green Brick and Meritage (MTH -0.23%) partnered on one large, I think it's like a 400 property development they've actually partnered to build out together. Just to quote some recent numbers, just to talk about where things are. Last reports through March 31st for Meritage, home-closing increased 25% year-over-year. LGI Homes reported, what was it in April, for the end of the prior period, they reported home closings were up around 50%. Then in May, like the day after they reported the prior earnings, they reported home closings growth of 57%. There is this rapid acceleration of not just sales, but also closings that continues to accelerate. There's just this massive amount of pent-up demand. I like these three, I am going to share a chart because I do want to talk a little bit about just briefly, the risks that you have to think about and why my guess and this probably has something to do with buying my friends here, may have raised them a little bit lower and that's homebuilders are pretty leveraged generally. I'm showing debt to equity and then debt to assets. You look at the higher leverage wins on the top end you have companies like Toll Brothers, LNR, and Meritage Homes is up here and then you've got, I'm looking for right now, LGI and Green Brick. LGI is actually one of the lower debt to equity and then Green Brick right here. You see these leverage ratios as compared to like NVR, which we'll talk about later in the show. It's leverage ratios are very, very low and I think it's one of things you will see when we get closer to the other end of the rankings. Then you look at debt to assets. Again, the same thing you see in the middle of the pack, but these are high debt to asset ratios in general. I'm going to just tease everybody when we do talk about and we are later you see NVR looks like it has some of the highest debt to asset ratios, but it also has a killer app in terms of its balance sheet that makes that not something to worry about. With the higher-leverage businesses, I don't particularly see that as a massive risk right now, which is why I rated them higher. But it is a risks and investors certainly have to be really conscious out when you think about homebuilders.