Two Reasons Why the Next Boom in Housing Is in Full Swing
Editor's note: It's easy to forget sometimes... You can create life-changing wealth outside the stock market, too.
In today's Masters Series essay – adapted from the December 6, 2019 Digest – True Wealth analyst Chris Igou describes how his father did just that... with a real estate investment that has doubled in value AND provided a beautiful view of the North Carolina mountains.
Chris then explains why this story is relevant today. He says the housing market has two major tailwinds behind it right now, and he shares the "one click" investment you can make today to take advantage of these trends.
Two Reasons Why the Next Boom in Housing Is in Full Swing
"She couldn't see the opportunity!" my dad recalled again as we stood in the living room...
He knew the real estate agent missed something. And he was downright giddy about it.
I'd seen this type of excitement from my dad before...
He had done something like this in the past – seen the hidden value in a property no one wanted at the time, bought it, and held 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 that property had reached 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.
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.
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 onto 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'd recently heard a similar story from your dad or another close relative. Or if you'd told that type of story to your family and friends.
That's because the real estate market has done incredibly well since 2011... We're a long way from the depths of the housing crisis roughly a decade ago. But here's the thing...
There's still plenty of upside left.
Today, I'll explain why that's the case. And I'll detail why I believe the next phase of the housing boom is really just beginning.
First, big investment banks are stepping in to invest in real estate...
Goldman Sachs (GS) is looking to provide $3 billion to cash-strapped real estate owners.
You see, thanks to the coronavirus, many real estate owners took a hit from the stay-at-home orders. Money started to get tight. And in some cases, these real estate owners needed cash to get through the crisis.
That's where Goldman Sachs stepped in... It can provide liquidity to folks in the short term. And these folks can invest in quality properties along the way. Here's how Goldman Sachs managing director Harold Hope put it in a recent article on real estate blog The Real Deal...
There are going to be some good properties that have some short-term struggles and they are going to need additional capital. We partner with the owners of those properties... to allow them to get to the other side of COVID.
Goldman Sachs sees the opportunity for two things...
- To help distressed real estate owners get through today's crisis.
- To invest in good properties along the way.
It's not just Goldman Sachs buying real estate, either... Brookfield Asset Management is also putting money to work in cash-strapped retailers. The company plans to invest up to $5 billion.
Today, the pros are stepping up and buying distressed real estate. They're taking advantage of deals just like the one my dad found in North Carolina.
Now, we know the pros are buying. And that's a good sign for the real estate market. But there's an even more important factor today. It's at the heart of every asset boom in real estate...
It really boils down to Economics 101...
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. This helped get rid of the oversupply. And eventually, it led to a turnaround in the housing market.
And thanks to the coronavirus crisis, we're now seeing housing permits tank once again.
You see, applications for new building permits fell to their lowest level since 2015. In fact, new housing starts fell 45% from their January peak. Take a look...
Before the coronavirus, new permits to build homes were at 12-year highs. Now, they've fallen to multiyear lows. That's a good thing for folks looking to invest in real estate...
You see, the freeze in houses being built will help prevent a major oversupply of housing.
Now, if the market was seeing extreme levels of oversupply, this could potentially be a concern. But that's not what we are seeing right now.
A quick way to measure this is to look at how many months it would take to sell the current supply of housing. Today, that's around six months... right around the historical average since 1960.
Homebuilders that have stopped building homes are actually making the supply-demand ratio even better.
Investment pros like Goldman Sachs are buying real estate. And with building permits at multiyear lows, this is good news for housing prices. We have two major factors going on in the housing market right now...
- Investment firms are buying real estate, which will likely help drive the next leg higher in the real estate market.
- Homebuilders aren't building homes, which will limit supply on the market and drive prices higher.
Both of these factors are major tailwinds for housing prices in the months ahead.
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 growing 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 more than 40 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. Since bottoming in March after the broad market sell-off, ITB is up more than 85% – almost doubling the return of the S&P 500 Index in that span. But as I said, it should continue to rise as the housing bull market continues in the months ahead.
So if you've set some cash aside for a real estate opportunity, it's a great time to put that money to work. And ITB is one of the easiest ways to make the trade. Consider buying it today.
Good investing,
Chris Igou
Editor's note: Are you interested in learning more about the wealth-building opportunities in real estate? You're in luck. We're excited to announce that True Wealth editor Dr. Steve Sjuggerud has been working on a new project – and we can't wait to share all the details...
Most people know Steve for his work in stocks, but he'll be the first to tell you he actually made most of his personal wealth in real estate. And for the first time ever, at 8 p.m. Eastern time on Wednesday, June 24, he's going public with ALL of his real estate secrets.
Steve plans to share how everyday investors can make huge gains in the next housing boom... and how real estate can be even more lucrative than stocks – with almost none of the normal stress that comes with investing.
During this event, Steve will reveal a brand-new kind of real estate investment opportunity that's been off-limits to regular investors until recently... and he'll explain why he believes it's the best way to get started in real estate right now.
Make sure you don't miss this exciting special broadcast on June 24. You can sign up now and get more information right here.