Why I’m Still Bullish On Homebuilders In 2022

A few days ago, my wife walked into the room and asked if we could talk.

“I think I’m ready,” she said. “Can we start looking at houses?”

I had been waiting for this moment. I’ve been ready to move for the better part of a year. After watching the value of our modest little home soar during the pandemic, the temptation was great. Up until that moment, we had decided to put it off. But I could tell she had been giving it a lot of thought. Between living in a changing city that we no longer feel tied to, having a growing family and wanting some more elbow room, plus the equity we had built up, it just made sense.

Thankfully, I’ve been down this road before. But that won’t make it any easier, not in this environment. According to Redfin, this January is shaping up to be the most competitive January housing market in history. And while things may slow down somewhat as the year progresses, I think the housing market is likely to remain red-hot for quite some time.

The Problem In A Nutshell

By now, we are all familiar with the factors that shaped the housing market last year. The Covid-19 pandemic exacerbated an already tight housing market. Record-low inventory, combined with supply shortages slowing down new construction, plus a surge in demand from people looking to relocate, led to an incredible surge in prices.

The question, of course, is what comes next. We all know higher rates are coming. That may tamper some of the demand. Whether the Federal Reserve hikes hikes rates three times this year, maybe more, mortgage rates will undoubtedly rise. In fact, the average 30-year mortgage rate rose to 3.45% last week, the highest in nearly two years. But when you look on a longer time horizon, it’s easy to see just how low rates are (and will still be for a while) on a relative basis…

Source: Federal Reserve

We could see more inventory come online as supply chains begin to untangle in 2022 and homebuilders accelerate building activity. According to the Census Bureau, new housing starts in November climbed 12% to 1.68 million. That’s a step in the right direction. But as you can see from the chart below, we’ve had a chronic shortage of new housing starts since the financial crisis.

Source: Federal Reserve

Plus, there’s another factor to consider. As this article in the Wall Street Journal points out, Millennials are “supercharging” the market by finally joining the ranks of homebuyers. As my colleague Jimmy Butts pointed out to his subscribers recently, CoreLogic recently reported that Millennials accounted for 67% of first-time home purchase mortgage applications and 37% of repeat-purchase applications in the first eight months of 2021.

To put it simply: this is an entirely brand-new cohort of buyers entering the market. I’ll let you guess what that means for demand (and prices).

How We Can Profit

The bottom line is, if I were a betting man, I’d say things cool down from “red-hot” to merely “hot”. I think we’re likely to see a surge of building activity in 2022 along with continued strong prices.

This is good news for homebuilders like Top Stock Advisor holding Lennar (NYSE: LEN).

While the company’s fiscal fourth-quarter results were hampered by supply chain challenges, it still managed to report $8.4 billion in revenue, which was a 24% increase over the same quarter last year. Earnings per share, meanwhile, increased 39% year over year to $3.91.

Both numbers were short of lofty expectations, but they’re still major advances. In the meantime, LEN has doubled since Jimmy added it to the Top Stock Advisor the portfolio in March 2020, beating the S&P 500’s 56% return.

It still may take a few months to iron out the supply issues. But as the housing market remains strong, I think LEN will continue to deliver strong returns for quite some time.

I may dive into more detail on why I’m bullish on real estate and housing in particular in the future. But if you’re looking for more ideas on what this year will look like — and how you can profit, then you need to check out our annual list of “shocking” market predictions for the coming year…

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