The Housing Breakout Is Only Just Getting Started

Let me be honest. July is normally not an exciting time for stocks. It’s summer. People are on vacation. And when earnings reporting season starts to dry up, volume does, too — if it hasn’t already.

surburban homes on a cul-de-sac (housing stocks)
Source: Shutterstock

But as we at InvestorPlace like to say: It’s a market of stocks, not a stock market.

That is so true, and one area of the market is bucking the traditional trend: the homebuilders.

If you caught this episode of MoneyLine, you saw that my chart of that week was the iShares Home Construction ETF (BATS:ITB). This ETF has struggled to break through the $49-$50 level. It nearly did in mid-February, before everything fell off the shelf.

But finally, late last week, ITB broke through $51. Not only were the homebuilders up on a down day in the market …  they’ve been racking up new highs ever since.

Of course, no breakout is any good to us unless it continues. In this case, I believe it will. So today I want to talk about that — and I’m going to give you two reasons why.

The first is simply the incredible fact that people have been able to get a 30-year fixed mortgage for less than 3%.

Back in the early 1980s, folks were paying 14% … 15% … even 18%. This time last year, that rate was 3.81%. That’s cheap, but it’s gotten so much cheaper.

The reason, of course, is that the Federal Reserve slashed rates to save the economy from COVID-19. And it looks like it’s working. Businesses are hiring (outside of the service and restaurant industries, which continue to be affected), and people are getting back into the housing market:

  • The July National Association of Homebuilders Housing Market Index came in at 72. That was a 14-point increase. The expectation was for 60, so it blew that away. So did the sub-indexes.
  • The June reading of 58 was a 21-point increase.
  • Also in June, mortgage applications grew nearly 20% from last year. Considering April’s number was down 35%, that’s a very dramatic bounce back.

Part of what’s going on is a rush to suburbia.

I hate to say this because I’m a city guy, but I get it. I bought a condo in December on the water in Baltimore –– which I love — but I’d planned to be on the road six months a year. Now, as I’m not able to do that because of the COVID-19 shutdowns, I start to think: “Maybe I want a yard.” And when I’ve casually looked at houses, I see that the sellers in the suburbs are getting what they ask.

But even outside of that, the housing boom makes a lot of sense — simply because low interest rates make homes affordable to someone who was previously not able to make the monthly payment. And this trickles down even more …

People can step up into bigger homes. They can also get into the same home they would have bought last year … paying less, saving more, and having more disposable income.

Meanwhile, millennials have been waiting to start families. And now they can.

Add it all up and the demand is so high that the supply hasn’t kept up! Take a look at the 10-year chart of U.S. existing home inventories below. They’ve been cut in half since 2010. No wonder U.S. housing starts are climbing just as sharply in the other direction.

I’ve been talking about this for a while, but I’m astounded at how much ground the housing market has covered in such a short time. When you consider the context, the huge breakout in the Home Construction ETF makes a lot of sense.

And here’s the second reason this is all going to continue … the homebuilders stocks are still cheap.

I recommend one in Investment Opportunities. We added it in September 2019 after I did a ton of research and interviews with the millennial generation. Its price-to-earnings (P/E) ratio is around 15, versus 22 for the S&P 500. So it’s about a third cheaper than the market. Its price-to-sales ratio is at 0.5 – which is only a fourth of the market (at 2.2)!

Keep in mind that homebuilders typically do trade below the market average. Earnings will also see a dip this year due to the pandemic, but revenues are still expected to increase. And no matter what, these kinds of valuations are flat-out cheap!

The current environment is creating an opportunity we do not want to miss in a hypergrowth trend leading the way into the “new normal.” You can bet I’ve got my eyes peeled for bargain buys, and if you want to be on the list to find out about the next one first, click here to learn more.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.


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