Standard Pacific Corp. (SPF)

[eastunder]

Homebuilders: Perhaps One of the Best Buys of the Decade
by: Jeffry Chmielewski December 10, 2010

http://seekingalpha.com/article/241088-homebuilders-perhaps-one-of-the-best-buys-of-the-decade?source=yahoo

I think homebuilder stocks may be one of the best buys of the next decade. Buy them now and put them away. If they go lower, buy more. There, I said it. Now, you can either laugh at me or listen to my simple explanation. The choice is yours.

The Trend

As it turns out, the US Census has been nice enough to collect lots of interesting data over the last few decades, and you can access it for free on their website. You can have a lot of fun looking at the numbers (well, at least I did).

Fascinatingly, if you track population growth and housing starts over long intervals (10 years or so), you will find that housing starts over long periods of time track population growth. It makes sense. Every time the population grows enough to form a household, that household needs to find a place to live. And because the number of homes in the country is static, we wind up building new houses and apartments for all the new households.

Based on historical population growth, this rate has generally averaged about 1.2 to 1.5mm homes a year (or 13mm to 15mm every ten years, excluding the bubble years). The problem is that during the housing bubble, we were building around 2mm houses a year. According to the US Census, we built almost 11mm homes from 2001-2006 alone. In hindsight it becomes perfectly clear that we were massively overbuilding for the first half of this decade.

But here is where it gets VERY interesting.


From 2007 to 2010, the last 4 years of the decade, the US built less than 3.5mm homes. We have now potentially UNDER BUILT in the last half of the decade, by as much as we OVER BUILT in the first half. We have built almost exactly the same number of houses from 2000-2010 as we built from 1990-2000 -- around 14mm with population growth around 30mm in both periods (subject to official 2010 Census results).

Estimates of the US population in 2020 vary, but if the past is any indication, we will add between 25 and 30 million people over the next ten years. And as a result, we will have to build between 13-15mm houses by 2020. Housing starts will need to double or triple in short order to keep up with population growth – especially if they stay depressed in 2011.

The homebuilders know this. That is why they are stepping up land purchases. Look at the balance sheets – they’re clean, and they have runway. They’ve termed out their debt and have no significant maturities for several years. They’ve written off the land purchases made during the bubble, but they still own the land. They’re profitable at the lowest level of housing starts EVER. The small local builders have gone under, leaving the big public companies to grab share during the next cycle. They’re well positioned. And they trade near tangible book value. Just buy them now and put them away.

The population of this country is still growing and will continue to grow. People need places to live. According to the National Association of Homebuilders, GDP from residential construction has hovered around 5% since the 1970s. In 2010 it’s shaping up to be around 2.5%. Get involved now before residential construction reverts to the mean. By the time everyone else notices, you’ll already have a double, if not more. The trend is your friend. The housing rebound and the economic rebound will be one and the same.

More Jobs = More Construction = More Jobs = The cycle will continue.

But what about the foreclosure overhang?

I don’t think it particularly matters. Foreclosures may continue to depress housing starts for a while as we work through the inventory. But it only means we will have more homes to build over a shorter time period as the decade progresses – in effect, a stronger rally on the back end.

Remember, foreclosures do not reduce end unit demand for housing units. The majority of them enter the rental pool (although some wind up moving in with Mom and Dad or doubling up). Just because you’ve defaulted on your loan, it does not mean that you don’t need a place to live. You lose your big house and rent a small house. It just takes time to transition the defaulted properties from the weak hands to the strong hands of landlords.

And homebuilders have time. They’ve fixed their balance sheets and are waiting. They’re profitable at the lowest starts ever, and they’ll be REALLY profitable when housing starts move back to track population growth and household formation. Buy them now before everyone else figures it out.