The housing market is on fire.
Just two weeks ago, the S&P CoreLogic Case-Shiller Home Price Index showed that U.S. home prices set another record in September, rising nearly 20% year-over-year. Home prices in the U.S. have now risen by more than 10% year-over-year for 10 straight months. For context, over the past five years (2015-2020), annual home price appreciation rates have hovered right around 5%.
Make no mistake: This housing market is hot – almost too hot.
The last time the housing market was this hot was back in 2004-2005. At that point in time, home prices had rattled off 27 straight months over 10%-plus year-over-year growth – right before the housing bubble burst.
Many pundits warn we are heading into a similar “bubble bursting” these days.
But we aren’t. Instead, we’re in the first innings of a 10-year bull market in housing. Here’s why.
The red-hot housing market of 2004/05 was driven by bad lending practices. Greedy banks were giving out loans to just about anyone who asked for one, and those loans were being given out at exorbitantly high rates. The 30-Year Fixed Mortgage rate averaged about 6% in those years.
The result? A bunch of under-earning households were burdened with loans too big to pay back. So, in the fourth quarter of 2007, mortgage debt-service payments as a percent of disposable income soared to a record-high 7.22%. Then as soon as the economy started to hit shaky ground, people were unable to pay off their mortgages – kickstarting an unparalleled housing market crash.
Today’s housing market couldn’t be more different.
It’s not driven by greedy banks giving out bad loans with high mortgage rates. Lending practices have been cleaned up. The 30-year Fixed Mortgage rate averages 3% these days – half of what it was in 2004-2005. And mortgage debt service payments as a percent of disposable income have plunged to record lows of below 4%.
So, while today’s housing market is hot, it’s hot for an entirely different set of reasons than why the housing market of 2004-2005 was red-hot.
In stark contrast to that housing market, the drivers underpinning today’s hot housing market are durable – and will last for another decade, at least. Those drivers include:
- A demographic-related surge in homebuying demand. Millennials and baby boomers are colliding to create the biggest homebuying demand surge we’ve seen in decades. Millennials have developed a reputation for postponing big life events, such as getting married, having kids, and buying homes. Now, they’re doing all of those things, as they’ve mostly reached an age and income where doing so makes logical and financial sense. This translates into tens of millions of new homebuyers entering the market over the next decade, at the same time that tens of millions of boomers are reaching that age where they are looking to downsize. This coupling is creating a huge homebuying demand surge that should last throughout the 2020s.
- Ultra-low financing costs. The 30-year Fixed Mortgage rate hovers around record lows of 3% today. Interest rates are likely to remain lower for longer as the Fed has created a U.S. economy and market that is almost reliant upon low rates. They won’t pull the rug anytime soon. So long as financing costs remain low, home prices can continue to go up without putting too much pressure on homebuyers.
- Very tight housing supply. Coming out of the 2008 Housing Market Crash, homebuilders were hesitant to build a ton of new homes because consumers were hesitant to buy new homes. This hesitancy lasted a decade, throughout which homebuilders didn’t build that many homes, creating an enormously supply-constrained market that won’t resolve itself quickly. According to Stephen Kim, a housing analyst at Evercore ISI: “The industry would need to sustain a two-million-starts pace for a decade to bring the industry out of its current underbuilt situation.” To that end, this market will be defined by low-supply and high-demand for the next decade – a recipe for strong home price appreciation.
- A revitalized view of the importance of a home. Covid-19 changed the world. One of the most pronounced changes was a revitalized view of the importance of the home, since the home is now where many of us work (thanks Zoom), workout (thanks Peloton), watch movies (thanks Netflix), and more. So long as consumers continue to do those things – and we believe they will for a long, long time – people will continue to place increased value on their homes.
Folks, this isn’t a bubble. The housing market is in the first innings of a decade-long bull market.
That’s good news for homeowners, bad news for prospective home buyers, and ultimately great news for housing market investors.
All of those stocks look like good buys for the next decade.
But that list doesn’t include the best housing stock to play the decade-long housing market boom.
Instead, the best housing stock to buy right now is a completely different type of company… one that isn’t just a participant in the housing market… but actually one that is completely redefining how the world buys and sells homes.
Because here’s the thing: Nearly 40% of millennials – who are turning into the heartbeat of the housing market – are comfortable buying a home online.
Yep. You read that right. The home shopping market is going to shift online because the new buyers in the market want to buy homes online.
And at the epicenter of this trillion-dollar-shift in the U.S. housing market is one technology startup – one tiny stock that will soar more than 10X over the next few years.
To find out the name, ticker symbol, and key business details of this explosive investment opportunity, click here.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.