Axios recently reported that according to the latest data from Freddie Mac, the U.S. housing deficit was 3.8 million units. However, that estimate was from Q4 2020.
CNN Business stated in March that the U.S. housing market was short 6.5 million homes.
“The gap between single-family home constructions and household formations grew to 6.5 million homes between 2012 and 2022,” stated CNN Business contributor Anna Bahney.
“However, this figure overstates the housing shortage, since new multi-family homes offer options both to buyers and renters. If multi-family construction is included — which is predominantly rental units — this gap is cut to 2.3 million homes.”
The National Low Income Housing Coalition stated in a March press release:
“[A] national shortage of 7.3 million affordable and available rental homes for extremely low-income renters – those with incomes at or below either the federal poverty line, or 30% of their area median income (whichever is greater).”
We can argue all day about what is the accurate number. However, there is no denying America has a housing shortage that makes housing affordability, especially in cities like San Francisco and New York, next to impossible.
If you’re an investor, betting on homebuilders is the most obvious way to play this shortage. In 2023, the iShares U.S. Home Construction ETF (ITB) -- 66.4% of its $2.12 billion in net assets are invested in homebuilders -- is up 32.5%, more than double the S&P 500.
That’s the obvious way to benefit from the housing shortage. Here are two not-so-obvious ways to ride this unfortunate trend.
An Affordable Housing ETF
As I looked at the various housing-related ETFs to choose from, I came across something different from Impact Shares. The ETF provider has three interesting ETFs: The NAACP Minority Empowerment ETF (NACP), the YWCA Women’s Empowerment ETF (WOMN), and the Impact Shares Affordable Housing MBS ETF (OWNS).
Naturally, it is the last one I’m interested in, given the topic of this article is about a housing shortage causing affordability issues for many Americans. Launched in July 2021, “OWNS invests in agency mortgage-backed securities (MBS) backed by pools of mortgage loans made to minority families, low- and moderate-income (LMI) families, and/or families that live in persistent poverty areas,” states the ETF’s homepage.
I'm not suggesting that this ETF will be responsible for single-handedly solving the housing shortage, but you have to start somewhere. More affordable housing developers would be convinced to launch bigger housing projects if more funds like this one existed.
As an investor, you’re interested in making money from your shares.
However, despite an ETF name that could scare away many investors, it has attracted more than $111 million in net assets in less than two years. There are plenty of ETFs with much longer track records attracting far less. It's an accomplishment, to be sure.
You’re not going to get rich holding OWNS. However, with a 2.54% yield, it’s a good ETF to own if you want to protect yourself on the downside.
Insulation for the Nation
Home insulation is one of those things you can’t go without. Installed Building Products (IBP) is one of the largest insulation installers in the residential new construction market in the U.S. It started in 1977 in Columbus, Ohio. Today, it has more than 10,000 employees operating out of 240 branches across the country.
In the three months ended March 31, it had $659.3 million in revenue, 72% generated from residential new construction. Another 16% comes from commercial business, 6% from repair and remodel work, and 6% from manufacturing and distribution.
Of the major categories it serves, insulation accounts for 60% of its revenue, followed by garage doors (7%), waterproofing (7%), and several others, including rain gutters, window blinds, etc.
Its growth strategy is to grow organically and through acquisitions, both in the insulation market and in complementary markets for both commercial and residential. Since 2011, IBP has made 88 acquisitions to grow its business, with an annual target of $100 million in revenue acquired through its acquisitions.
IBP has grown its revenue from $1.51 billion in 2019 to $2.67 billion in 2022, a compound annual growth rate (CAGR) of 20.9%. At the same, it’s grown its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) from $197 million in 2019 to $439 million in 2022, a CAGR of 30.6%.
If you bought $1,100 of its stock in its February 2014 IPO ($11 a share), it would be worth $12,765, a CAGR of 30.1%.
With a housing shortage that’s not going away, IBP will be a large-cap stock before you know it.
The Bottom Line
When you look at the top 10 holdings of most housing-related ETFs, including ITB, you’ll notice that most stocks are homebuilders, home improvement centers, or real estate investment trusts.
However, dig a little deeper beyond the top 10, and you’ll find other gems, such as Installed Building Products, who will continue to benefit from housing construction, no matter who the leading homebuilders are.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
