In this episode of Motley Fool Money, Motley Fool senior analyst Jason Moser discusses:
- The challenge for first-time homebuyers.
- Why he prefers investing in residential real estate through home-improvement businesses (rather than homebuilders).
- The airline industry’s woeful track record on share buybacks.
- Why you should ask, “Is this the best use of capital?” whenever you see a share buyback announcement.
Also, Motley Fool senior analysts Asit Sharma and Deidre Woollard discuss the growing trend of secondhand fashion and the opportunities for companies involved.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Aug. 18, 2022.
Chris Hill: We’ve got airlines, housing, and we need to talk about your wardrobe, too. Motley Fool Money starts now. I’m Chris Hill joined by Motley Fool Senior Analyst Jason Moser. Thanks for joining me once again this week.
Jason Moser: Well, thanks so much for having me.
Chris Hill: Let’s start with housing because it is not just the price of gas that is falling across America. According to monthly data from the National Association of Realtors, sales of previously owned homes fell nearly 6% in July. There are a few different ways we can go here. But one thing that caught my attention was just from the standpoint of people who are looking to buy houses, it’s been a challenge the last couple of years, and even with prices dropping, first-time homebuyers, you look at the data, and I don’t want to say they’re getting squeezed out, but they are making up a smaller percentage than they historically do. Typically, it’s around 40%. In July, it was just under 30%.
Jason Moser: Yeah. It definitely feels like as time goes on, it becomes more and more difficult for that first home purchase. I think I’m sure you and I can look back in our lives and remember when we made our first home purchase, that’s a big purchase. Obviously, it requires a lot of resources. It requires a lot of, frankly, education, and understanding of the process and what you’re getting [laughs] ready to commit yourself to. But, financially just becoming more and more prohibitive, and from the first-time homebuyers’ perspective, that’s really frustrating. You feel like you just don’t ever have a chance. Now, on the other side of the coin there, if you’re a homeowner today, you’re feeling really good about things. Homeowners themselves are in really good position because we’re seeing still a limited supply. I think everybody would pretty much agree that right now we are in the middle of the housing shortage here, domestically. We need to see new homes being built.
The problem obviously is the economy continues to face challenges, the interest rate environment continues to rise. We’re seeing homebuilders canceling. Those homebuilder cancellation rates have more than doubled since April. I think if you look at July, you saw 17.6% of builder contracts actually fell through. That was versus 8% in April. If you go all the way back to July of 2021, it’s 7.5%. This is a very difficult climate for folks to commit to buying a home. I don’t know that we should expect that to change anytime soon. Then you top that off with existing home sales data, which is obviously falling as well. I think we saw nationwide 63,000 deals, I saw quoted on existing homes, fell through in July. There was about 16% of the homes that went under contract. You can imagine as a seller and you feel like you’ve got this thing locked down and ready to go forward, and then that deal falls through, well, that’s going to be pretty frustrating for both parties involved. It’s just a very difficult market right now in regard to housing.
Chris Hill: From an investing standpoint, how does one invest confidently in residential housing right now? Is it through the homebuilders themselves? Is it through the businesses that operate in some ways on the margins of the housing industry?
Jason Moser: Personally, I think homebuilders are absolutely one way to do it. Now, I think you said invest confidently, and I think when it comes to homebuilders, that can be a little bit more of a volatile ride. I think a lot of that just has to do with the data that we’re seeing playing out here today. I absolutely agree that homebuilders are one way to do it because typically when you have a shortage, you need to make up for that by building more, and that would indicate that the builders should be seeing some action here in the coming years. Now they’ve got to deal with, obviously, supply chain constraints. They’ve got to deal with the rising interest rate environment. They’ve got to deal with inflation. It’s a little bit of a tricky time. I think confidently, I personally just like more the home improvement in retail sectors. You look at the Lowe’s and Home Depot of the world.
To me, I feel like that is probably a bit more of a reliable, safer long-term play. I think at least you can buy into those businesses and feel like you can own them indefinitely because they benefit from virtually every condition. If there’s a shortage, then you got people sticking in their homes and they are doing more stuff to their homes. If you look at Home Depot’s results they announced earlier, this week pro sales outpaced the do-it-yourself consumer sales in the quarter. That’s just an indicator that there are home-improvement projects that are happening, makes a lot of sense. The homeowner is in a great place equity-wise. It doesn’t take a lot to go ahead and open that home equity line of credit, or take out that home equity loan, and finance that project you’ve been wanting to do. They benefit rain or shine. I do feel like there are a couple of different ways to do it and I think having exposure to all homebuilders and the improvements base makes sense. It feels to me like the improvements base is probably a little bit of a steady ride than the homebuilders might be.
Chris Hill: U.S. airlines got $54 billion in federal aid during the pandemic, and a condition of that assistance was that the airlines were not allowed to use the money on share buyback plans. That ban is going to end on Sept. 30 and now the airlines are starting to do better financially. The unions representing pilots, flight attendants, and other industry employees are now publicly urging the airlines not to resume buybacks when the ban is lifted. I have to say if I were a shareholder of Delta, United, American — I think I’d probably say the same thing.
Jason Moser: [laughs] Yeah. It goes to show you the difficulties in running a publicly traded company. You’ve got so many stakeholders that you have to appease, and it’s not always going to be in line. They don’t always line up with each other. I agree there. It feels like to me it could be argued that there’s a very sound argument here for holding off on those share repurchases. From a headline perspective, it sure does look like the airlines are having a difficult time right now dealing with their businesses. The customer experience just doesn’t seem like it’s been all that stellar lately, and it’s for a number of different reasons. But at the end of the day, it ultimately means that these airlines need to focus on making sure that customer experiences is good as it can be. Clearly, you got to make sure that your employees are happy as well. Now, it can be also argued that the airlines just simply aren’t getting these share repurchases right in the first place.
Now I will go and preface this by saying that I know some folks love the airline space, feel like there’s a lot of value there, a lot of opportunity there, I’m not one of those people. I don’t like investing in airlines, I don’t own any airlines, I have a hard time imagining that I ever will own an airline. I feel like there’s just plenty of data out there really to back that up. Perhaps there’s a value investment there at some point or another, and that’s your cup of tea, then that’s great. But for me, when I’m looking for businesses that I can just buy and hang on to, airlines just do not fit the bill. When you look at the way the bigs have performed here recently, their share prices, their repurchase plans, it just isn’t lining up. Look at a few examples here. Let’s look at these big names in the airline space, Delta. They spent close to $5.5 billion on repurchases since 2018. You go back five years, $5.5 billion on share repurchases. Now, their share account is actually down close to 10%.
But that’s great, that’s what you want to see, at least when you’re making those repurchases. The whole idea there, bring that share count down and ultimately make those shares outstanding a little bit more valuable. Now, even Delta shares are down around 22% over that time stretch. But then when you look at the other three, look at United, they spent close to $5 billion on repurchases. The share count is actually up, shares are down 40% over that five-year stretch. Look at American, they spent around $3.5 billion on repurchases. Share count is up, their shares are down 66% over that time frame. Look at Southwest. One that we’ve always looked at is maybe a little bit of a disruptor in the space in focusing a little bit more on that customer experiences and looking out for shareholders a little bit more.
They spent around $6 billion in repurchases over the stretch. That share count is up, and those shares are down 24%. They’re not really seeing the long-term impacts of spending on those share repurchases. I think when you look at that data, it really does I think bolster the argument that maybe these guys need to focus on something other than share repurchases for a while. They can get their house in order or get their customer experience back in order and get their financial house in order. Then you can get back to returning value to…
Read More: How to Invest Confidently in Residential Housing | The Motley Fool