In fact, the biggest home building phases outside of the 2003-2006 mania were in the early 1970s, the late 1970s and the mid-1980s. Two of those intervals peaked at 10-year Treasury rates above 10 percent and everything on this chart happened at mortgage rates far higher than today’s rates. What was the cause of this huge demand in the face of high mortgage rates and very unaffordable homes? We had the largest population group hitting first-time home buyer status constantly from 1970 to 1986!

The chart of housing starts versus Treasury interest rates is not population adjusted the way the prior chart was. There were 180 million people in the United States in the early 1960s, 225 million in the 1980s and America is approaching 330 million residents now. Don’t 330 million people need more homes than 225 million did?

Putting This All Together

Among our 330 million residents are 86 million people between 24 and 42 years old, with their group peak population year at 27 years old, currently. They marry, on average, in their late twenties and early thirties and have their children between the ages of 28-40. Their full force is not yet into the housing start data. At 5 percent mortgage rates and with today’s level of affordability, history shows that there is nothing in the way from having a home building boom over the next 10 years to satisfy this demographic demand.

We believe we could repeat the peak housing starts of the prior decades and the market share of homes built will disproportionately flow toward the large, publicly traded home builders like NVR (NVR) and Lennar (LEN). While we have temporary softness (slower growth) in housing starts and permits, long-duration investors would be wise to catch this potential boom at prices which could very well represent John Templeton’s “point of maximum pessimism.” Look at the price charts for these two home builders:

As contrarians who are looking to buy the best economics at the most favorable prices, you must be lonely. As our slogan reminds us, only the lonely can play!

William Smead is CIO and CEO of Smead Capital Management.

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