LGIH - How Investors Should Approach 2022's Homebuilding Volatility
In this clip from "Real Talk" on Motley Fool Live , recorded on Feb. 11 , Motley Fool contributors Jason Hall and Matt Frankel discuss the many moving parts of home building in 2022 along with the many challenges the industry faces including the high demand and shortage of homes.
Jason Hall: LGI Homes (NASDAQ: LGIH) reports earnings in a couple of weeks from now. I think it's still going to be toward the end of February. But, it reports monthly home sales and announced earlier this month that it closed 442 homes in January. I went back and looked at January 2021 and it sold 650 homes a year ago. Already, we see the home closings are falling substantially. Essentially, what has happened is home builders are running out of inventory. Matt, you and I have talked about this multiple times. They've sold through their inventory so much in late 2020 and all of last year sold through their inventory, and had to accelerate their builds just to try to meet demand. We saw record margins for a lot of these companies, record earnings for a lot of these companies, and we still see their orders continue to grow. The issue that we're running into now, and I think we're going to find out a lot more about this when LGI does report, is they're running into the fact that this is the part where it's going to take a lot longer to catch up than normal because there's just not as much prepped land. You don't have land that has infrastructure in place, that has water that's already in place, that has electrical that's already there, and that already has fiber that's run. Now, that adds a year to being able to fully develop that land and actually start building houses and selling houses on it. I think we're going to learn a lot more about all of those pressures this year, and the first half of the year is probably not going to be great compared to last year for a lot of these companies. I think they're still going to get great margins. Their selling prices are probably going to continue to go up. But, then we get into the second half of the year as their inventory situation starts to improve a little bit, we might start to see some improvements from the first half. But then, Matt, this is something I wanted to get your thoughts on. I begin to start being a little bit more worried about continued supply chain pressures, lumber costs, labor costs, and then the rising interest rate environment when we get into the second half of the year. Now, we're starting to put pressure on affordability. Is that potentially going to start squeezing margins for these companies and their operating margins aren't going to be as good, it's going to affect their cash flows and earnings. I think that is a realistic expectation for how the cadence of 2022 could play out for home builders pretty broadly. What do you think?
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How Investors Should Approach 2022's Homebuilding Volatility