The U.S. Housing Boom Still Has Room to Run... And This Business Is Profiting

Mortgage rates are at their highest levels since March 2020. But that hasn't slowed down the housing market just yet...

According to the Mortgage Bankers Association ("MBA"), the average 30-year fixed-mortgage rate rose to 3.52% in the week ending on January 7. That's up from a nine-month high of 3.33% in the prior week.

The MBA cited the Federal Reserve's recent hawkish turn, which has pushed Treasury yields higher.

Mortgage rates typically rise and fall in tandem with long-term Treasury yields. These yields usually increase when the Fed raises short-term rates to control inflation.

And homebuyers are flooding the market to take advantage of current mortgage rates before they rise even further...

The MBA's Purchase Index, which measures mortgage applications on a weekly basis, rose 2% between December 31 and January 7. This is a trend that could continue in the near term...

You see, mortgage rates are still relatively low compared with historical data. Over the past five years, the 30-year fixed-mortgage rate has averaged about 3.93%. So, despite the recent uptrend in mortgage rates, we're still below the recent average.

This could mean that more prospective buyers are incentivized to act now and purchase a home before rates head even higher.

Today, we're sharing one of our favorite ways to play the current housing market...

We're talking about the $19 billion homebuilder NVR (NYSE: NVR). Longtime Stansberry Research readers should recognize this company, which we last wrote about in May.

NVR sells homes in 14 states – including Maryland, Virginia, and Florida (among others). Over the past 12 months, it has brought in about $8.8 billion in revenue.

We've long said that NVR has the best business model in the homebuilding space.

You see, homebuilding is typically a very capital-intensive business. Most companies have to pay up to buy land that they can later construct houses on. And it often takes years for these lots to turn into orders and homes. So, builders often have to sit on empty lots, which makes them susceptible to downturns in the housing market.

But NVR does things in a better way...

NVR pioneered what's called a "land light" model. Instead of buying land and waiting for homes, it options them. NVR gives the landowner a small deposit up front to hold the lots and pays the rest only when it's ready to start building homes. This protects NVR from holding lots of inventory, limiting the downside in a housing bust.

This business model is so effective that other homebuilders, including Lennar (LEN) and Hovnanian Enterprises (HOV), have begun to adopt it.

And when you look at how strong NVR's financials are, it's easy to see why...

Over the past 12 months, NVR has reported a return on assets ("ROA") of 21.4%. Put simply, ROA is a company's net income divided by its total assets. It's a good measure of a company's profitability. And with an ROA over 20%, NVR shows excellent profitability.

That's even more impressive when looking at its competitors...

The SPDR S&P Homebuilders Fund (XHB) holds a basket of homebuilders and other housing-related stocks – including NVR. Over the past 12 months, XHB has "only" reported an ROA of 11.3%. And that includes NVR, which has about a 4% weighting in XHB.

So, NVR is nearly twice as profitable as its competitors. And that's all thanks to its asset-light business model, which translates into strong gains for the company's shares...

This past year, NVR's shares have climbed steadily higher, rising more than 40%. Over that same period, XHB has returned about 32%, while the S&P 500 Index returned "only" about 23%.

NVR also has a long track record of rewarding shareholders through buybacks...

During the past five years, the company has bought back $1.98 billion in stock. That's about 11% of its current market cap. And this trend is continuing...

In November, NVR announced a new $500 million share-repurchase program, which represents about 3% of its current market cap.

Additionally, housing demand remains strong, which is a powerful tailwind for NVR.

As consumers flock to the housing market, they will continue to turn to NVR for their new homes. And since it has the best business model in the homebuilding space, these orders will end up with thicker profits than those of NVR's competitors. That should continue to propel company shares higher.

Sometimes investing is simple.