The U.S. Has a Housing Shortage -- Here's What Investors Need to Know

Housing inventories are at their lowest level in decades, and it's likely to take years before supply and demand balance out. In this Fool Live video clip, recorded on Jan. 21, Fool.com contributors Matt Frankel and Jason Hall discuss the housing problem in the U.S., and what investors need to know. 

Jason Hall: I want to show another chart that I think is the thing that is maybe the most underappreciated here. On the supply side on the existing properties, we've talked about that. All the things with COVID, with less people wanting to list their home. We've talked about it before. It was going to be, what was supposed to be called the Silver Tsunami, where all of the baby boomers were going to move to Florida and the Carolinas.

They were going to live in these big retirement communities and it just hasn't happened. Retiring in place has been a much bigger thing. We sold that big five-bedroom house. We sold it to an empty-nester couple who just wanted to live closer to their adult kids who live in the town that we left. The dynamics that were expected never happened. Then the global financial crisis coming out of that. Homebuilders just basically didn't build houses.

After the first several years coming out of the global financial crisis, we weren't even building enough houses to replace the homes that were having to be demolished for one reason or another. We were actually net losing the number of existing homes in the United States and that was like three years that that lasted. But again, you see this climb upwards and you see again that median build rate of about a million and a half. We've just passed that. Oh, by the way, the U.S. population has also grown enormously. You think about that build rate, you think about the growth in the population, you think about this massive shortage.

We were talking about it at the beginning of the show, about the homebuilder capacity, where we are. We could basically double the homebuilder count in the U.S. for three or five years to really just get caught up, I think is the thing. There's a lot more than just corporate buyers going on here. There's a whole lot of dynamics at play. We just don't have enough houses. Matt, I think that's the big takeaway is there's just not enough houses.

Matt Frankel: Yeah, I agree. I don't know how this problem gets solved, especially right now with supply chain disruptions and labor shortages, which I mentioned one of the big homebuilders has a backlog that's growing. That's a big reason why it's the supply chain and wage disruptions that are really limiting capacity. I don't know how and when this problem gets solved. What do you think?

Hall: This is not going to be a transient. When sure we might see with like other stuff. Supply chain is going to catch up. But with housing because it takes months to build a house and you're talking years to get the land prepped, that's the big hold up. It's just getting the infrastructure in place to build these communities. It's going to be a long-term thing. I think as an investor, that's to me, I think it just circles back around to homebuilders as being such a great opportunity over the next decade.

Frankel: I agree. With that in mind, what are your favorite ways to play the homebuilders right now? I know you mentioned a few, but if you could just narrow it down to one or two, people should give a look at.

Hall: My favorite is LGI Homes (LGIH -1.48%), but I'm going to say Meritage Homes (MTH -1.98%) because they've been doing it a little bit longer and they've been really successful at it. LGI Homes is still trying to find their footing. I really like Meritage Homes. Steve Hilton, still the chairman founded the company, just stepped down as CEO. Less than a year ago his replacement was his lieutenant. Has been there for a very long time. Very well-run. They're really laser focused. They've got a good balance sheet.

They transitioned to mostly spec homes. They are building homes on speculation without having a contract in hand. Because they focus on that entry-level market. Their margins are really good, they are better than custom homes. Entry level, you can get better margins. You can maximize the land. You can build more properties per acre. I really think their model works well. They have a long history of executing well. I don't have it right in front of me, I know it's trading for less than eight times trailing earnings, 2022, their earnings may not be as good this year as last year, but I guarantee the earnings are going to be growing over the next decade.