Headlines about the residential real estate bubble popping any day now are nothing but fake news.
Just because prices of homes have skyrocketed doesn’t mean they’re coming down as they did in 2008, a true real estate crash. Home prices aren’t coming down; they’re going higher.
And there’s nothing “bubbleicious” about it.
In today’s Total Wealth, I’m exploringwhy the feared residential real estate “bubble” isn’t a bubble -and how you can ride the long-term appreciation potential of the boom by investing in it.
Not Your Old-Fashioned Bubble
No, this is not “déjà vu all over again,” as Yogi Berra might call it. The booming residential real estate market now is nothing like the last real estate boom.
Sure, home prices are going through the roof, pun intended.
The S&P CoreLogic Case-Shiller National Home Price Index just posted an annual increase of 18.8%. That’s a record and dwarfs anything we saw in the last residential real estate run-up, which started in the late 1990s, reached its zenith on a broad basis in 2006, peaked in 2007, and crashed like nothing the modern world ever saw in 2008.
And, yes, there are similarities.
Artificially manipulated low-interest rates inflated the last bubble. 30-year fixed rates fell below 7% in the late 1990s and into the mid 5% range by the mid-2000s.
This time around, rates are even lower. Pandemic relief efforts, courtesy of rate manipulating maniacs at the Federal Reserve, pushed 30-year fixed rates down to near 3.5% in 2020. They now sit just below 4%, at 3.95%.
In the last cycle, mortgages made by banks and specialty lenders were turned into mortgage-backed securities guaranteed by Fannie Mae. The same thing’s happened again this time.
But differences on both fronts far outweigh similarities this time around.
Last time, low rates were offered to subprime borrowers that drove unsustainable price appreciation.
Prime borrower demand had been mostly satiated. So, investment bankers, mortgage bankers, and brokers targeted subprime borrowers, enticing them into too-good-to-be-true deals as much as they were too easy to get.
Remember NINJA mortgages? No income, no job, no assets, no problem loans, no doc loans, zero-interest loans, and variable rate mortgages? They all played their part in the toxic waste build-up last time but can’t be found today.
Lending standards have risen sharply since the subprime mortgage meltdown. Besides, borrowers today are putting up bigger down-payments, not flipping homes, and increasingly paying cash when they can.
More importantly, the speculation on leveraging “all things mortgage-related”, like agency guaranteed mortgage-backed securities, credit default swaps on actual MBS pools and synthetic or “referenced” pools, and a slew of other mortgage-related products traded globally don’t exist today. Thank heaven.
Yes, rates are rising, and that’s worrisome. And yes, the Fed’s going to stop buying $40 billion a month in mortgage-backed securities, and that’s worrisome.
But those things are only worrisome through a historical prism, and how they looked then isn’t how things look today.
Supply and Demand Bull Market
It’s not an egregious supply of mortgage money driving home prices higher now; it’s lack of supply (of homes, not money) this time around that’s fueling price appreciation.
It’s not vulgar speculation and flagrant flipping that’s driving demand this time around.
The work-from-home crowd wants homes. Millions of people intending to retire to places like Florida, Arizona, California, or elsewhere want to buy into those dreams. Especially now that they know they may have less time in a pandemic scarred existence.
Millennials, just now edging into their thirties and forties, are forming families and looking for homes to settle into.
As aging Baby Boomers and their parents downsize and look for newer, smaller homes, and sadly pass on, they’re gifting and leaving hundreds of billions of dollars to heirs who are looking for their own dream homes.
There’s old money and new money already invested in equities and bonds and art, looking for more tangible parking places for their cash, who are buying new homes, bigger homes, second homes, investment properties, and speculation on rising home prices.
Anyone who understands inflation is here and is looking for an inflation hedge knows residential real estate is as good as it gets.
It’s demand. Natural, organic, well-heeled consumer demand chasing an ever-tightening supply of homes that’s driving prices up this go-round – and it will keep driving them higher for years to come.
That doesn’t mean an ugly market crash or a Fed-induced uncontrollable recession won’t stop the rocket ride to the stars somewhere shy of the moon. Price appreciation could stall out, maybe even backtrack 5% or 10%. But that’ wouldn’t be for long.
There’s a gigantic buy-the-dip crowd out there now who’ve learned from the equity buy-the-dip crowd, only the residential real estate buying crowd is bigger, more long-term oriented, and more motivated.
Prices aren’t going down. Prices are going higher. Residential real estate’s in the early innings of a historic bull market.
One way to invest in the residential real estate bull market is by adding a smattering of homebuilders to your portfolio. Now’s a good time to get into a bunch of them because they’re on sale.
Companies like Lennar Corp. (LEN), D.R. Horton (DHI), PulteGroup, Inc. (PHM), and Toll Brothers (TOL) are all seeing their stock prices come down, with a few making new 52-week lows. They’ll rebound when the Fed’s done raising rates in the next 12 months and the stock market’s through with its correction direction.
Or, you could buy the stock of a company that supplies most of them with at least some of the building materials they incorporate in their home manufacturing, as well as supplying sub-contractors and remodelers around the country. Builders FirstSource, Inc. (BLDR) is that company.
BLDR sports trailing twelve-month revenues of $17.8 billion, and a profit margin of 8%. The company’s trailing twelve-month net profit available to common shareholders is a tidy $1.42 billion. But way better than that, quarterly revenue growth (year over year) is 140% and quarterly earnings growth is a whopping 613%.
If you want to ride the residential real estate bull market, you’ll want to saddle up some BLDR stock for the ride.
Cheers,
— Shah
Source: Total Wealth