Betting on the great American builder boom

Washington is edging closer to its most consequential housing overhaul in decades.

The House just passed its latest version of the 21st Century ROAD to Housing Act yesterday – a sweeping effort to make the American Dream more affordable again by boosting supply, loosening zoning constraints, and modernizing financing.

Most of this legislation has support across party lines. In fact, only 13 House members (all Republicans) voted against it.

However, there has been significant drama surrounding certain politicians’ push to limit build-to-rent housing and the institutional investors behind it. The question is whether these single-family rentals (SFRs) are helping to solve the housing shortage by delivering new rental supply…

Or distorting it by concentrating ownership.

Earlier versions of the ROAD to Housing legislation determined the latter, adding restrictions galore to SFR landlords. This included them having to sell newly built rental homes within seven years – even though they’re typically financed on longer-term horizons and don’t become profitable for about a decade.

Richard Ross, CEO of real estate developer Quinn Residences, reported that “all capital [had] dried up for built-to-rent” ventures within two weeks of that announcement. “No one’s willing to finance a project that has this sort of gun to their head.”

Fortunately, the Senate has since nixed that clause. But real estate investment trusts (REITs) like American Homes 4 Rent (AMH) and Invitation Homes (INVH) remain out of favor as the larger legislation is worked out.

Ultimately, there will be winners and losers that come out of it. And it’s not necessarily easy to sort out which companies will be which.

Then again, thanks to today’s investment analysis, we might not need to.

Back in the early 2000s, several close friends of mine founded a company called Great American Homes in South Carolina. My mother became one of their real estate agents, and let me tell you: She was selling houses as fast as they were built.

In fact, Great American Homes did so well for itself that nationwide homebuilder Pultegroup (PHM) bought it out – quickly and for a significant premium. So my friends decided to start another company, bringing me onboard this time around.

That meant I got to experience the euphoria of the real estate boom… and the misery of the global financial crisis it helped form.

On the plus side, that gives me a valuable perspective on how to look at the housing market today. So while most people are weighed down by how bleak it looks, I’m seeing that the slowdown we’ve been experiencing these past few years could be far more cyclical than structural.

I truly believe the housing market is ready for a reset. Macro pressures should start easing through lower interest rates, cooling inflation, and/or greater geopolitical stability.

I’m not saying it will happen next minute or even next month. But once the Iran conflict is resolved and inflation begins to cool again, we could see construction activity accelerate as pent-up demand is finally released – particularly if the 21st Century ROAD to Housing Act passes.

For the record, I do believe that SFR REITs will be able to manage the renovated landscape, especially with that congressional concession just made. After all, they were born out of the Great Recession, a time of intense changes; so they’re used to rolling with the punches.

But even if they don’t, there will be plenty of upside left for the larger housing ecosystem, including:

One way to invest in that view is through diversified exposure – including by buying shares of an exchange-traded fund, or ETF, like The Hoya Capital Housing ETF (HOMZ).

The first step in navigating this investment opportunity is to realize how far-reaching the housing ecosystem is. The second is to see how differently each segment responds to:

Accounting for all these factors and factions is precisely what Hoya Capital Housing ETF seeks to do. It tracks a rules-based index of 100 companies to provide diversified exposure across the full U.S. housing industry rather than a narrow bet on homebuilders alone.

That broader scope is important in today’s housing market, where dueling forces are producing different outcomes for different segments.

Which, as mentioned before, could all turn on a dime.

For example, it’s true that today’s affordability constraints have pressured home sales activity. But higher mortgage rates aren’t uniformly negative for the entire housing ecosystem.

They’ve also extended the rental cycle, supported demand for professionally managed housing, and encouraged homeowners to renovate rather than move.

The Hoya Capital Housing ETF doesn’t fight the fact that there are always winners and losers in the housing market. Instead, it tries to capture this “rent or own” dynamic through exposure to both sides of the housing equation.

Rental operators, residential REITs, homebuilders, building products companies, home improvement retailers, and housing services firms: It includes them all. As such, it’s more aligned with total housing-related spending – and in various economic conditions – instead of a single company or segment.

That balance is rarely a bad thing. However, it becomes even more attractive considering the undeniable housing shortage we’re in – the very reason for the ROAD bill’s existence.

The supply deficit has been years in the making, driven by underbuilding after the financial crisis, restrictive zoning, labor shortages, land constraints, and rising construction costs.

The United States needs more living space built. It’s as simple as that. And, eventually, that need will have to be met.

Wide Moat Research thinks that time is almost here.

We’re betting on the “Great American Building Boom,” and HOMZ is one balanced way to do it.

Happy SWAN Investing!

Brad Thomas
Editor, The Wide Moat Daily

Real estate investment trusts (REIT) have been largely unloved for years. Ever since interest rates started going up, their stocks have been going down.

But I’m calling it: the end to that trend.

In this week’s Wide Moat Show, Nick Ward and I discuss Q1 REIT earnings… and the very good news I’m taking from it.

Catch the full episode right here.