This Corner of the Real Estate Sector Says “Buy Now!”

Andy Snyder|July 13, 2022

There’s bad news from the tip of the spear.

We got a dire email last week. It was from a high-end architect we talked to this time last year.

Back then, his firm was quite selective about who it would work with. Just to talk to them about a potential project cost big money.

But last week… they were looking for business.

When the housing market slows, it’s always the architects and designers who get hit early. Talking to them is the first step of any project.

The fact that this once-busy firm is now soliciting folks for business… isn’t good news.

It paints a dire picture for the rest of the industry. The slowdown is here.

Let this be an early warning.

But let it also be a buying opportunity.

By the Numbers

The statistics in the housing sector are staggering.

During the last two years, the average home price in America has risen by 40%. Much of that jump has come thanks to the 20% surge in supply costs.

Even old homes rise in value when the prices of the lumber and drywall inside of them soar.

But now, interest rates are flirting with the 6% level – a figure nearly twice as high as where they were a year ago. We’re back to levels we haven’t seen since 2009. With many folks (including this guy) expecting rates to fall again soon, variable-rate mortgages are coming back into fashion.

Add it all up and it’s no surprise that builder confidence has fallen each month this year.

It’s also no surprise that homebuilder stocks are some of the cheapest on the market… many sporting single-digit earnings multiples.

Lennar (LEN) built nearly 60,000 homes last year – a 13% year-over-year surge.

This year, its shares have been slashed by a third.

Its P/E ratio is a mere 5.4.

Toll Brothers (TOL) is perhaps the biggest name in the business. It beat expectations in its last earnings report. It delivered some 2,000 homes during the first quarter and has 6,000 more in its backlog.

Even after the company posted a surprisingly large profit of $78 million, shares have come down more than 35% from the highs they set late last year.

Today’s buyers are paying a multiple of just 6 times last year’s earnings.

KB Home (KBH) also smashed earnings expectations during the first quarter. Its profits grew 55% year over year. It posted $300 million more in sales than analysts had estimated.

It was a big beat.

And yet, its P/E today is just 4.2. And its price-to-book ratio – at 0.8 – is half of what it was a year ago.

That’s what happens when shares fall by 40%.

Investors aren’t quite pricing in a 2008-level disaster… but they aren’t far off.

Done Discounting?

If you’re a frequent reader (you poor thing), you know we’re a fan of real estate. When times get nasty, home prices hold their value like few other assets.

They surge higher when times are good. But when times are bad, all sorts of market mechanics help them hold much of their value even while stocks plunge.

And as the top blows off today’s market, savvy investors are drooling at the opportunity to get in while the buy-at-any-price crowd is in hiding.

As we've mentioned before, we’re sitting on a pile of cash and are getting ready for a big move.

Owning homebuilder stocks doesn’t offer the same sort of downside protection (see the numbers above) as owning a home. But, like the architect who sent us a desperate email, they do run out front of the industry.

It’s quite easy for the market to sell them when it’s worried about bad times ahead.

Given the news lately, homebuilders have had plenty of downside pressure. The industry is slowing.

But investors are making a mistake if they’re selling at these prices.

We’re in a recession. But it’s a fickle one. We’ll get out of it just as quickly as we got into it – before most folks (including the oh-so-slow-to-react Fed) even know we’re in it.

The Fed will start lowering its rate hike expectations by the end of the summer… just in time for a rash of homebuilder earnings reports in late August and early September.

That’s when the bull run will take off.

All it will take is a leader or two beating paltry expectations… and boom. Money in the bank.

Folks who buy today need guts.

It’s scary. We get it.

But with a shortage of more than 4 million homes in the country, today’s bargains won’t last. They can’t.

Buy now.