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Here's Why Homebuilder Stocks Should Outperform the Market Over the Next Decade

2020 has been a great year for many homebuilder stocks. Even with the economy -- and millions of Americans -- still struggling from the coronavirus recession, home sales have surged this year. Some of the biggest winners include D.R. Horton (NYSE: DHI), LGI Homes (NASDAQ: LGIH), Meritage Homes (NYSE: MTH), and NVR (NYSE: NVR). However, since the announcement of positive results from two coronavirus vaccine candidates, investors have started selling their homebuilders, shifting their cash to laggards in other industries in anticipation of a post-COVID-19 recovery.

In the following video, from "The Wrap" on Motley Fool Live on Oct. 23, host Jason Hall, Motley Fool contributor Danny Vena, and Motley Fool analyst Jason Moser explain why the prospects for homebuilders should remain very strong for the next decade.

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Transcript:

Jason Hall: NVR, a big homebuilder, reported 40 percent order growth last quarter. Meritage Homes reported yesterday 70 percent order growth. It's huge. So here's my question. Homebuilder stocks over the next decade, Danny Vena, are homebuilder stocks going to be a good investment over the next 10 years?

Danny Vena: I would say yes, but I would also say that if you pick quality stocks, and I think Meritage Homes is one of those among the homebuilders. If you pick quality stocks, it doesn't really matter what industry, I think homebuilders will do well over the next 10 years. Pick quality stocks, hold them for a decade, you're going to do better than the majority of investors.

Jason Hall: Jason Moser, drop some knowledge on us.

Jason Moser: Yeah. I absolutely think so. We're at a point now where clearly there is limited supply as far as homes are available. It's a nice time to be a homeowner. It's kind of a tricky time to be someone looking for a home. All homebuilders are not created equal, so I think that you have to be a little bit picky in what you might be looking forward to the market there. I think DR Horton represents one of the top builders in the space, one of the largest, if not the largest homebuilder in the space, and you look at that one over long stretches of time. The homebuilders I think are great. They're ideal for long stretches of time. When you look at DR Horton, it's been a wonderful investment over the last 10 years. So I can certainly see a situation where homebuilders are poised to continue doing well for the coming decade.

Jason Hall: Yeah, there's just so many catalysts. You think about the big trend over the past three or four years that has a lot of legs is entry-level housing. It's just nowhere near enough. We saw a decade where homebuilders were not building small, affordable homes. They were building things that people had the money to buy, which was the custom staff and luxury homes and that kind of stuff. Now we have an entire generation that says, "I want a house. I'm married now. I'm having kids, I want to home." So that's a huge tailwind of pent-up demand and limited supply. Now we have the potential for work from home to drive even more people. I don't know if that will hold up, but it's interesting.

I'll caution this, I tend to agree. Think about Horton, you think about NVR -- LGI Homes, and Meritage which are really laser-focused on that entry-level market -- this is an industry that generally they're super leveraged businesses because they take out a lot of debt to buy homes, to buy property. They usually just sit on for a long time before they build, and in a normal recession, 2020 has been anything but normal. In a normal recession, housing falls off a cliff. Nobody goes on and buys a house if they're worried about losing their job. There's this bifurcation this year of people that are clearly still doing financially fine, and then all the people that probably weren't going to be in the home buy market anyway, they are the ones that are falling even farther behind. Yeah, I think you picked the right names, the best companies, and I think it is going to be great. Even though we've seen these stocks have crushed it this year, like 40, 50 percent, 60 percent gains, I still think a decade from now, the best ones are going to be market leaders.

Danny Vena has no position in any of the stocks mentioned. Jason Hall owns shares of LGI Homes, Meritage Homes, and NVR. Jason Moser has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends NVR. The Motley Fool owns shares of LGI Homes. The Motley Fool recommends Meritage Homes. The Motley Fool has a disclosure policy.


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