With the Federal Reserve hiking interest rates, real estate is hated right now.
And that isn’t the only reason for the sector’s current uphill battle. As we discussed last Wednesday, other factors are making homes too expensive for many people.
One of the main catalysts is that the U.S. continues to suffer from a housing shortage…
A 2021 report from the Federal Home Loan Mortgage Corporation said the country was short 3.8 million homes in the prior year. In 2018, the shortage was “only” 2.5 million.
The homebuying frenzy in the wake of the COVID-19 pandemic didn’t help either. And even with the market cooling off in recent months, a simple fact is clear…
America still needs a lot more homes.
Now, several reasons for this shortage are widely discussed…
Construction costs are high. Supply chains are erratic. And after the 2008 crash, many homebuilders failed and about 1.5 million workers left the industry.
But investors are largely ignoring another set of growing issues in the housing sector. These issues are hot in real estate and political circles. And they’re exacerbating the shortage.
Today, we’ll tackle why they could be critical for a reversal in the real estate space…
In short, I’m referring to “zoning.”
Zoning-type rules date back to ancient times. They separated incompatible land uses like waste disposal and religious observance. And they kept poor people away from the elite.
Los Angeles adapted the first land-use restrictions in the U.S. in 1904. And a little more than a decade later, New York City adopted the first citywide zoning regulations.
Over the past century, zoning laws have become far more complex…
For example, zoning laws often mandate building single-family homes on large lots. Some require a minimum number of parking spaces for a development. Other ordinances restrict attached or multifamily housing to certain areas.
The “NIMBY” (“Not in My Backyard”) crowd favors strict zoning laws. They oppose variances, object to expanded infrastructure, and so forth.
NIMBYs consider zoning laws to be critical to preserving neighborhoods. The idea is that they will keep existing homes desirable. And for these folks, that’s most important.
However, there’s a problem…
The more undeveloped acreage, the fewer homes a developer can build and sell.
So in other words… strict zoning laws are fueling the housing shortage in America. Consistent with basic economic principles, supply shortages mean higher prices.
That brings us to the “YIMBY” (“Yes in My Backyard”) crowd. It’s a newer label. And as you’ve probably guessed, it refers to the opposite side of the argument…
The YIMBY crowd is pro-development. These folks don’t think housing should be restricted. And importantly, they believe the way to solve the housing shortage is through density.
By that, I mean the YIMBY crowd believes we need more homes per acre. They reason that it will allow supply to catch up with demand. And that will make prices more affordable.
What does that mean for us as investors?
Fortunately, a few stocks can help us monitor the YIMBY crowd’s efforts…
Skyline Champion (SKY) and Cavco Industries (CVCO) are a certain kind of homebuilder. Both companies produce super-affordable manufactured homes.
And if you’re interested in the future of housing, consider adding Century Communities (CCS) to your watch list. It’s starting to build with 3D-printing and robotics technologies.
These three companies are all unacceptable to the NIMBY crowd. The homes they build – and the customers they target – aren’t compatible with low-density development.
So as investors, we want to look for signs of life from these three companies. The Power Gauge’s Technicals and Experts categories would likely react the earliest.
That can only happen if these companies find more sites on which to build their homes. Seeing these companies flourish would signal YIMBY progress.
That would be good for these companies, of course. But more importantly, it would signal a growing opportunity for the real estate sector as a whole…
YIMBY progress would mean increased supply. That would help fix the U.S. housing shortage. And of course, it would be a boon for all the companies building those homes.
That’s why I’m keeping a close eye on these three companies in particular. They’re my leading indicator in the single-family housing market. Keep your eyes on them today.
Good investing,
Marc Gerstein
