The first quarter of 2022 has brought a nasty mix of headwinds for homebuilders, such as rising mortgage rates, which dampen demand for housing and make it less affordable, and severe supply chain bottlenecks, making it harder to complete builds on time and budget. Not surprisingly, shares of homebuilders have fallen substantially and are now among the cheapest in the market.
One such example is Green Brick Partners (GRBK), down 40% from its 52-week high. After the sell-off, Green Brick looks incredibly cheap at less than five times next year's earnings, and it sits at the nexus of two key long-term growth drivers.
Texas-America's new tech hub?
Green Brick is primarily exposed to Texas, and for a home builder, that is an excellent place to be. Texas is one of the hottest real estate markets in the country, with an influx of residents from other states driving demand and a wave of high-powered companies moving to the Lone Star State, bolstering the local economy. For example, in 2020, Texas attracted the second-biggest inflow of residents among all states (trailing only Florida). The trend continued in 2021, with Texas recording the largest numeric gain in population, primarily led by domestic immigration..
Tech companies like Oracle have recently moved their headquarters from the Bay Area to the state's capital, Austin. Tesla just officially opened a Gigafactory in the same city and has relocated its headquarters from California to Austin. Even Apple, which is in many ways synonymous with Silicon Valley, built its second-largest campus in the U.S. in Austin. Austin has been dubbed “Silicon Hills,” and tech companies like Advanced MicroDevices and HP have already established a foothold in the city.
Green Brick is building a new development on 383 acres of land outside of Austin to capitalize on the growing demand in this market, which has some of the lowest available inventory in the U.S . The low number of houses for sale combined with the growing demand make Austin a perfect market for a developer like Green Brick. Outside of Austin, Green Brick is a leading developer in the Dallas-Fort Worth metroplex, another thriving real estate market. While Austin may be Silicon Hills, Dallas is not to be overlooked as it is home to a long list of major U.S. corporations such as Texas Instruments, ExxonMobil, AT&T, and Lockheed Martin.
In addition to this tech renaissance in Texas, the state's local economy is well-positioned to benefit from a resurgent oil market.
Outside of Texas, Green Brick also has operations in Florida, Georgia, and Colorado.
Major housing shortage
In addition to being well-positioned geographically, Green Brick should also benefit from the long-term demand for housing after it gets through the challenging short-term timeframe. There is a glaring shortage of housing in the U.S., and homebuilders will need to build a lot of homes to eventually alleviate the gap in the years to come, especially as more millennials and even zoomers enter the home-buying market for the first time.
While many people would like to buy a home and have the funds, there simply aren't enough homes to go around. In fact, February 2022 was a record-setting month for home sales — new listings dropped 3% from the year before and the total inventory of homes on the market was down just 26% from a year ago. The Federal Reserve indicates that the pandemic has severely curtailed the supply of homes, from over 1 million in January 2020 to just 400,000 two years later in January 2022. With existing homes in short supply, developments like Green Brick's offerings in Texas and Florida will be more in demand than ever.
Between the undemanding valuation and its exposure to two secular growth drivers — Texas' booming economy and population influx, and the overall housing shortage in the U.S. — Green Brick looks like a solid buy for patient investors.
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Originally published on Fool.com
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
Michael Byrne has no position in any of the stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices, Apple, Green Brick Partners, Tesla, and Texas Instruments. The Motley Fool recommends Lockheed Martin and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.