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Homebuilding Industrial Complex
I'm conflicted so I would like your opinion. I'm thinking of making a big bet in the homebuilding industrial complex. $XHB $ITB and specifically on $LEN.
Happy to discuss this in the comments more.
(A) Macro Background
- Similar to oil, we haven't invested sufficiently in our housing stock for over a decade. Prices have risen and the homebuilders are increasing their margins.
- Inventory is super low, especially when you compare it against the US Population / single-family home inventory --> credit: Ycharts).
- The major homebuilders have been changing their business model. Homebuilders have been using options instead of buying land outright. Using options is called controlled positions. Buying it is called "land owned". Homebuilders have been increasingly using controlled positions and decreasing land owned leading to reduced capital tied up in inventory at any given moment and higher returns on capital invested. $NVR has always used this model. $LEN has been moving closer to this. The others are going at it but at a slower pace. This will allow them to weather a downturn better, by conserving capital.
- Valuation has come down substantially. I think the market doesn't expect margins to maintain at these levels.
- Risks: Rise of interest rates. Historically, interest rates --> lead to higher mortgage rates --> less sales. But this time around, there is a significant amount of backlog and pent-up demand that we might not see the drop in sales.
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