Despite rising interest rates, often a bucket of cold water for new construction, homebuilders are showing remarkable resilience. They keep hammering away at record pace; recent housing starts data shows construction surging a record-breaking 21.7%. That's a phenomenal 1.63 million homes in the making – a very convincing beat, 11 standard deviations higher than last month’s data.
To put that into perspective, it's the biggest boom since the frenetic activity we saw in October 2016. And this isn't an isolated event - it's a nationwide phenomenon, coast to coast, from cities to suburbs.
Here’s the interesting thing: the surge isn't limited to just the single-family homes we often envision. Multifamily starts, which include everything from duplexes to apartment complexes, are up an impressive 30% too, adding a new dimension to the housing landscape.
But there’s a million-dollar question we’re going to answer today, before we get to the stock pick:
Are builders betting on interest rates dropping next year?
Banking on more attractive mortgage rates for buyers to fuel this expansion seems like a big gamble, considering the Federal Reserve’s buzzkill calls to “expect interest rates to stay higher for longer.” They’re far from finished their mission to bring inflation all the way down to their target rate of 2%.
And then there’s that big rise in multifamily starts; maybe the focus is shifting toward rentals.
It’s not a stretch to imagine these homes are being built with the intention to rent them out.
And when it comes to financing these properties, Redwood Trust (RWT), a mortgage loan company, is the name to watch. They've got a hefty dividend and are operating heavily in mortgage-backed securities and multifamily housing finance. Trading at $6.22 a share with a tangible book value of $9.42 and a whopping 9.88% dividend yield, it’s looking like a solid “buy it and never worry about it” kind of investment.
I feel confident about this recommendation. Redwood Trust is entrenched in residential mortgage-backed securities and mortgage banking. They're banking on the not-at-all-crazy idea that regional banks – which have been beaten black and blue in 2023 – will turn gun shy and avoid home financing in the future, especially in the multifamily space. They're ready to step in and fill any gaps left by regional banks and even big players like Wells Fargo and the Fed.
So, here at the start of a new American housing boom, don’t just watch the builders.
Sure, they're riding the wave, hitting 52-week highs, and there's undeniable potential in names like KB Homes (KBH), Meritage (MTH), and Cavco (CVCO). But the real value is likely to be on the finance side of things, with companies like Redwood Trust. Come with us on this “deep dive” full analysis of Redwood…
About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.