At the current moment, it might seem weird to suggest housing stocks are a great buy, given that U.S. existing home sales are plunging and the global economy is dealing with an unprecedented pandemic.
But make no mistake, it is a great time to buy housing stocks. And it’s an especially great time to buy LGI Homes (NYSE:LGIH) stock.
Over the past three months, the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) has risen 70% on hopes of a swift recovery in the housing market in the second half of 2020. LGIH stock has led the way in this surging group, with shares up more than 100% since mid-March.
This rally has legs.
The housing market, supported by favorable fundamentals, will dramatically improve over the next few months. As it does, housing stocks will keep rallying. So will LGIH stock, because LGI Homes is one of the better looking boats in this rising tide.
Here’a a deeper look.
Housing Stocks Look Good
At the current moment, the fundamentals underlying the housing market strongly imply a significant and rapid recovery in buying activity in the back-half of 2020, and into 2021.
It all starts with the idea that the U.S. economy is gradually reopening and recovering from the Covid-19 crisis. Not because the pandemic is over. Rather, because consumers, institutions and corporations alike are learning how to keep the world turning while managing Covid-19 risks. Consumer, institutions and corporations will all get better at this balancing act over the next few months. As they do, economic activity will pick-up.
Buying activity in the housing market is closely correlated with overall economic activity. Consequently, as the economy normalizes over the next few months, consumers will start buying homes again.
On top of that, the current plunge in existing home sales isn’t a wipe-out of demand. It’s a delay of demand, since people still need a place to live. Thus, the shortage of buying demand in March, April and May, will lead to a surplus of buying demand in June, July and August.
Concurrently, mortgage rates are at all time lows. Low rates mean cheaper financing. Cheaper financing attracts more home buyers. Everyone is also saving their paychecks today, providing ample ammunition for home buying firepower in the coming months.
And, to top it all off, millennials are finally moving out, and the U.S. home-ownership rate is rising off multi-decade lows, with ample room for further gains behind drivers such as low rates, pent-up demand and huge savings accounts.
Given these favorable fundamentals, the current rally in housing stocks has more runway ahead.
LGI Homes Stock Looks Better
In the strong housing stocks group, LGIH stock is one of the best picks given LIG Homes’ favorable geographic and demographic concentration.
On the geographic side of things, LGI Homes has a strong geographic concentration in states with less strict Covid-19-related polices, and an underlying population that appears more ready to resume economic normalcy (and get back to things like buying and selling homes).
Think states like Texas, Florida, Georgia and South Carolina. LGI Homes has a huge presence in these states, and all of those states are among the most economically and socially “free” states at the current moment.
Assuming these states continue to lead the economic reopening charge, then LGI Homes should see its growth trends improve more quickly and more meaningfully than the broader U.S. housing market over the next few months.
On the demographic side of things, LGI Homes focuses on creating affordable, entry-level homes for first-time buyers. That’s the perfect market to be in right now, because low rates and big savings accounts tend to be a more positive drivers for first-time buyers, than for buyers higher up the value chain. The whole “millennials finally moving out” trend also plays into LGI Homes’ favor.
Consequently, because of sizable geographic and demographic tailwinds, LGIH stock is one of the most attractively positioned housing stocks to buy for the recovery.
Bottom Line on LGIH Stock
Housing stocks look good here. Yes, they’ve run up quite a bit. Yes, the best of the rally has already happened. But it’s not too late to buy in. The great U.S. economic recovery is in its first inning, and housing stocks will continue to push higher.
In that group, I like LGIH stock for its favorable geographic concentration in states leading the reopening charge, and its demographic focus on first-time home buyers — two things which should lead to LGI Homes’ numbers recovering more quickly and meaningfully than the numbers over at other homebuilders.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.