From Stansberry Research:
Everyone believes the housing boom is over...
For many, houses just look expensive. Prices have simply run up too high.
Last year delivered a near-perfect storm of events that shook people's faith in the future of the property market...
In 2018, home prices soared again. It marked the seventh straight year of gains based on the Case-Shiller 20-City Composite Home Price Index. Interest rates rose as well, which caused mortgage rates to jump... And that really spooked investors.
Rising rates, combined with higher home prices, put the affordability of homes further out of reach...
That's the narrative, at least. It's the perception investors have today.
Combine that with a few weak housing figures – like home sales – and it appears as if the good times are behind us...
But the reality is much different.
Few realize it, but the data tell a different story. Housing affordability is still strong in the U.S.
Supply and demand are still out of whack as well.
New housing starts – the number of new houses being constructed – plunged after the housing crisis. They hit all-time lows after the bust and have recovered consistently since then... But despite the rise in starts over the past decade, the number of new homes is still going up at a slower-than-normal pace.
Housing starts have averaged more than 1.4 million per year since 1959. Today's pace is just 1.26 million.
Builders haven't been putting up houses fast enough to keep up with demand. Along with the after-effects of the bust, part of the reason could be a shortage of lots. We're facing the worst shortage on record today, according to the National Association of Home Builders.
That's a strong sign we'll continue to see higher prices.
This is great for the housing market... and for homebuilders in particular...
And NVR (NYSE: NVR) is the best homebuilder around. To understand what makes NVR great, let's quickly walk through how homebuilders work...
The business isn't that complicated. These companies continually scout land for new developments. When they find a suitable tract, they buy it up and begin developing.
Homebuilding is a capital-intensive business. It means making big investments up front to buy all this land. And worse than that, these companies have to hold the lots they plan to sell on their books... oftentimes for years.
This makes homebuilders incredibly sensitive to housing downturns. They're cyclical businesses that can turn south in a hurry.
But NVR has found a solution to this problem:
The company pioneered a "land-lite" homebuilding business model. While most homebuilders buy vast tracts of land and develop them over years, NVR doesn't own any raw land – none at all. Instead, it options finished lots from land developers that specialize in cutting lots.
NVR gives the developer a small deposit up front to hold the lots and pays the rest only when it's ready to start building homes. As a result, NVR only maintains a small amount of lot inventory compared with other builders.
This is a small operational change, but it has a dramatic impact on the security of the business. NVR pays a small deposit for the right to buy a lot in the future. That means the company will never go bankrupt because of a housing bust. It's protected.
NVR can always walk away from a deal with only a minor loss or renegotiate the price... And the company doesn't waste money buying up huge amounts of assets that could lose value if the market turns.
This also makes the company's balance sheet look dramatically different from its competitors'. For NVR, just 40% of the company's assets are held as inventory. For its competitors, a majority of their assets are inventory. At D.R. Horton (DHI), the number is 73%. At PulteGroup (PHM), it's 74%.
This also makes NVR a more efficient operator. It makes way more money on each dollar of assets and equity than its competitors.
The company's return on assets ("ROA") is 26.4%. Its return on equity ("ROE") is 48.7%. Both of these metrics are far better than those of NVR's competitors. The S&P Supercomposite Homebuilding Index – which holds a basket of 16 of the top homebuilding stocks – has an ROA of 7.9% and an ROE of 15.7%.
And NVR's numbers are stellar not just compared to homebuilders... but compared to just about any business out there. (Just to give you an idea, the current ROE for the S&P 500 Index is 16.1%.)
NVR operates a uniquely asset-light business... And that's what makes it one of the most exceptional businesses in the world.
Unlike the rest of the market, NVR didn't bottom in December. The company's stock bottomed during the market sell-off two months earlier, in October. Since hitting a low of around $2,101 per share, NVR's share price has skyrocketed to $3,320 today. That's an incredible gain of about 58% in around seven months.
Right now, the housing market is stronger than almost anyone believes. And NVR is poised to benefit from the next stage of the housing boom.
Sometimes investing is simple.