Two Reasons Why the Housing Bull Market Is in Full Swing
Buying land at an 87% discount... Seeing what the real estate agent didn't... Two reasons why the housing bull market is in full swing... Big investors are shifting their focus to new opportunities... A long way from peak levels on this key metric... A simple, 'one click' way for you to invest in this trend...
'She couldn't see the opportunity!' my dad recalled again over Thanksgiving break...
He knew the real estate agent missed something. And he was downright giddy about it.
I (Chris Igou) have seen this type of excitement from my dad before...
He has done something like this in the past – seeing the hidden value in a property no one wants at the time, buying it, and holding on to make a big profit.
For example, in 1984, he took a chance on a river property in southern Georgia. A little more than a decade later, he sold it for a gain of nearly 160%.
During the housing bust a decade ago, he found another opportunity he couldn't pass up...
And fortunately, he had the money to take advantage.
He was in southwestern North Carolina, just a 10-minute drive from Lake Lure. (As my mom likes to remind us, Lake Lure "is where they filmed the movie Dirty Dancing with Patrick Swayze.")
My dad was meeting with a real estate agent, looking at deeply discounted properties. At the time, folks needed cash. And with no one to sell to, property owners had to dramatically slash their asking prices.
Standing on an open lot, my dad knew he wanted to buy. He saw the hidden value in the overgrown mountain property – value that wasn't as clear to the real estate agent...
"You don't want this one," she said. "You'll never get a great view from this property."
He didn't see it that way.
You see, the asking price of this property was as high as $279,000 during the real estate boom.
It may not have had a million-dollar view... But my dad knew it was worth much more than the asking price at the time of $35,000 – 87% less than its peak asking price.
The real estate agent didn't see the opportunity. But my dad did...
"With just a little clearing on one side of the property, you had a beautiful view of a nearby hallow," he told me over the holiday...
My parents ended up buying the property that day a decade ago. And here's the view after my dad cleared it...
Since my parents haven't needed the money for anything else over the past decade, they continue to hold on to the property to this day. Its value has gone up – a lot. The most recent appraisal put it at $72,000... more than double what my parents paid for it.
I wouldn't be surprised if you heard a similar story over the Thanksgiving holiday. Or if you told that type of story to your family and friends at the dinner table.
That's because the real estate market is booming right now... We're a long way from the depths of the housing crisis roughly a decade ago.
But the thing is, even though real estate prices have soared in many areas since the housing bust, there's still plenty of upside left.
In today's Digest, I'll explain why that's the case. And I'll detail why I believe the final phase of the housing boom is really just beginning. But first, I need to be clear...
This late in the game, we aren't going to find deals like my dad did. However, that doesn't mean the upside potential has completely disappeared. As you'll see, investment bank Goldman Sachs (GS) just initiated the final innings of today's great real estate boom...
You see, the big money is now moving inland to find quality real estate...
In the U.S., coastal properties have generated demand for generations.
It's the American dream. Owning your own slice of the real estate pie in a prime population area. And for decades, coastal real estate has been the hallmark of that dream.
For the past several years, investment firms have been focusing on finding the best possible deals in real estate. And since highly populated areas on the coast have a history of holding value, they've been the focus for these firms. That's all changing this year, though...
The easy money in many coastal areas is gone. And according to a recent article from news service Bloomberg, big financial firms are turning inland to find better deals...
Institutional investors see opportunities in real estate in mid-size U.S. cities away from the coasts.
Goldman Sachs Group Inc. is eyeing markets including Denver, Austin, and Nashville, Jeffrey Fine, a managing director at the firm's merchant-banking division, said Thursday at a conference hosted by the NYU School of Professional Studies.
While property deals are thinning out along the coast, there are still opportunities inland. And Goldman Sachs is looking to take advantage of it... The company raised $2.5 billion back in July for real estate investment alone.
Goldman Sachs is betting big on real estate right now. And it's a major reason why I believe we could see real estate prices rally much higher before the deals start to dry up.
But this next step in the real estate cycle isn't the only case for higher real estate prices...
Homebuilders can't keep up with demand either...
Once the housing crisis started about a decade ago, homebuilders stopped building.
There was a massive oversupply of homes. Yet nobody was able to buy. So homebuilders were better off sitting on their hands instead of continuing to build new homes.
In 2009, housing permits for new homes hit their lowest level on record, based on data going back to 1960. And of course, the housing market suffered.
Ten years later, demand for housing is back. And homebuilders are finally catching up...
You see, applications for new building permits are at a 12-year high today. A steady climb in permits is normal during a recovery. It's what you'd expect as folks start buying real estate again. It's healthy.
But before the housing boom ends, we will likely see building permits near record highs again. When that happens, it will paint a gloomy picture for home prices moving forward...
Building permits hit new highs before the last housing crisis started. And we've seen the same thing happen a handful of other times going back to 1960.
There were too many homes, with too few buyers.
Fast-forward to today... Building permits for new homes have been on the rise since 2011. And now, housing permits are back at a decade-plus high.
So is it time to get out of the housing market? Are we expecting a slowdown in prices as supply outpaces demand? History says not so fast...
In fact, we're far from the previous highs that signaled bad news for the housing market. And we will likely see even higher housing prices – and higher permit levels – before the next peak.
Even though we're at a 12-year high, it's important to take an even broader view of the U.S. housing market. Looking back nearly 60 years, total housing permits are just above their long-term average. Take a look...
The roughly 60-year average sits around 1.35 million. Today's levels are only slightly higher at 1.45 million... And we're well below the previous peaks.
Permits have rebounded sharply during the housing bull market in recent years.
That's exactly what you'd expect. But as you can see in the previous chart, we aren't anywhere near the peak levels that we've seen during previous tops in real estate.
There's still plenty of demand for housing in the U.S. And building permits will continue to rise to meet demand. Ultimately, this is good news for housing prices for now.
There's a simple 'one click' way to take advantage of rising housing prices...
We have two major factors going on in the housing market right now...
- Investment firms are moving inland to find better deals, which will likely help drive the next leg higher in the real estate market
- Homebuilders continue to play catch-up with rising demand through new construction
Both of these factors are major tailwinds for housing prices in the months ahead. And while we're now in the final innings of the real estate boom, there's still plenty of upside left.
Best of all, you don't need to buy physical land like my dad did near Lake Lure...
You can simply own the sector that benefits the most from booming demand in housing – the homebuilders. And you can do it today with just one click in your brokerage account...
The iShares U.S. Home Construction Fund (ITB) is an exchange-traded fund ("ETF") that holds a basket of roughly 45 homebuilders and related companies. Its biggest holdings include homebuilders D.R. Horton (DHI), Lennar (LEN), NVR (NVR), and PulteGroup (PHM). These are some of the biggest players in the industry.
The ETF simply tracks the Dow Jones U.S. Select Home Construction Index. So far this year, ITB is up more than 50% – roughly doubling the return of the S&P 500 Index. But as I said, it should continue to rise as the housing bull market continues in the months ahead.
So if you've sat on the sidelines until now, you still have a chance to make money in real estate. And ITB is one of the easiest ways to make the trade. Consider buying it today.
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In today's mailbag, more feedback on Bill McGilton's Wednesday Digest about labor problems in the U.S., using San Francisco as a prime example... Have something to tell us? Take some time this weekend to send us an e-mail at feedback@stansberryresearch.com.
"The issue isn't whether immigrants can hold those jobs, it's the value conflict. By raising the minimum wage arbitrarily, governments have forced restaurants to survive economically by cutting back on staff. Two dishwashers are now one, etc. What happened to the free-market, where competition for workers was based on supply and demand as well as competence?...
"And it's not just the restaurant businesses that suffer under government taxes and regulations. Record numbers of businesses and earners are talking with their feet, leaving the tarnished 'golden' state for other tax and regulatory friendlier states and locations." – Paid-up subscriber M.S.
Good investing,
Chris Igou
Jacksonville, Florida
December 6, 2019
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