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How to Invest Confidently in Residential Housing

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.

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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 shareholders through these repurchases. But maybe for them, the better focus is focus on that reliable dividend policy, give people some cash in the pocket and steer away from the theoretical impacts of share repurchases, because clearly, it’s not helping them today.

Chris Hill: It’s a question we ask all the time regardless of industry, regardless of the business. When there’s a share repurchase plan we always ask like, “Is this the best use of this capital?”

Jason Moser: Exactly.

Chris Hill: In some cases it is, but in others, you just look at the track record, it’s just not.

Jason Moser: You’re right. That’s the question you need to ask, is this the best use of this capital? Look at something like a Berkshire Hathaway, everybody is longing for the longest time, they should pay a dividend. [Warren] Buffett, [Charlie] Munger, listen, “That’s cash that we feel can be put to better use.” Whether its repurchasing their shares, because they have such an intimate knowledge of their business operations or investing in other opportunities. It doesn’t seem like to me. When you look at the airlines, they’ve got so many problems that it just doesn’t feel like share repurchases are the wisest use of that capital. You also look at it going forward is the recent registration the Inflation Act here, there’s going to be a 1% tax on share repurchases. Now I think if I’m correct here, I believe that’s a net tax, so it’s going to be net of shares issued. It’s not just whatever they’ve repurchased they’re going to be taxed on that, it’s net of shares issued as well. There’s something to remember there. That’s something else to consider at least is that these share repurchases are going to get a little bit more expensive, as the cost of doing business so to speak goes up. But to me, no question. With airlines, it just doesn’t stand out as the best use of capital.

Chris Hill: Jason Moser, thanks for being here.

Jason Moser: Thank you.

Chris Hill: You know that pair of jeans you like, did it have any previous owners? For an increasing number of people, the answer doesn’t really matter. Asit Sharma and Deidre Woollard discuss the growing trend of secondhand fashion, and the challenges and opportunities for the companies involved.

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Deidre Woollard: I’m Deidre Woollard, and I’m here with Motley Fool analyst, Asit Sharma. We’re going to talk about the boom in secondhand retail. Hi, Asit. How are you today?

Asit Sharma: Hi, Deidre. I’m doing well, good to be with you.

Deidre Woollard: Well, let’s get into this, because this is a category I’m fascinated with. I see it as this real growth area for investors, because we’ve got some long-tail demographics that support it. When I was growing up, secondhand was profoundly uncool, nobody did secondhand. Now, resale is booming. One of the emerging leaders in resale ThredUP, they annually put out this report. I love it, it’s on the overall market. Of course, they’re going to say resale is booming because they’re ThredUP, but it also has a lot of facts from other places. They forecast that resale will grow three times as fast as the overall apparel market globally, and it could reach 82 billion in the U.S. alone by 2026. That just blew my mind a bit. There’s this whole shift going on in secondhand clothing. Asit, what’s going on with the younger generation here?

Asit Sharma: First, let me say, Deidre, that market is so massive. Eighty-two billion in just a few years, why do we need to invest in tech? [laughs] I thought about this a lot over the last few years. I think you’re a little younger than me, but we don’t always approximate generations, I think. There are lots of trends that are coming together, different from when we were younger. I think this younger generation, it tends to be more attuned to the effects of climate change, to waste, to social inequality. They’re much more a socially conscious generation. Let’s just say millennials all down are lumping a lot of generations together. These are all types of ideals that tend to benefit a circular retail economy. We’ve also seen over the last six or seven decades as we moved really gradually from this post-war industrial economy in the 1950s to what we have today, which is a consumption-based economy, this idea that what you wear is the first signal of social status has really dried up, that pull that you’ve got to have the nice new pair of Nikes.

Although people still love Nikes or crisp, clean, brand- new clothing, that’s no longer quite as important today. What you wear today, especially on social media, signals many things, like it’s your potential wealth status, but it could also signal how creative you are, the things that you like, it can signal to other people likeness. We saw some of these trends play out over many years. It’s just, I think social media amplifies the many virtues that clothing can have. These trends together with one more that I think is really fun are partly to explain that third trend is this experiential aspect for the youngest consumers, even younger than millennials. These kids love to thrift. In fact, the idea that today we’re talking about the word thrift as a verb takes me back to the late 1970s, early 1980s when I was a kid wearing bell-bottom jeans.

Deidre Woollard: I love that, bell-bottom jeans. I wanted to think about that because, so you’ve got this really big thrifting market that’s moved beyond those store racks that we used to shuffle through back in the day when I was looking for that perfect slouchy, oversized blazer. I’d liked the idea that we’ve got resale-as-a-service. This has come up in the last couple of years because all of these retailers watch all of their clothes go into this secondhand circular economy, and they’re like, well, wait, can we get it on that? They’re starting to, and they’re partnering with companies likeThredUP, but there are some big private services that are white-labeling this. It’s really interesting where we’re going with this, it’s this thing that’s called a circular economy. Like ThredUP, they’re partnering with Gap, Madewell, Tommy Hilfiger, Eddie Bauer, all these big brands. All these brands are now saying in their stores, we have resale as-a-service, or you can even turn into clothes. Is this what we’re going to be doing in the future, instead of taking that big bag to Goodwill or something like that, we’re going to be like, “Hey, here are these jeans I bought three years ago, Gap, take them back.”

Asit Sharma: Well, I want to return to Goodwill by the time we finish this segment. There’s something very interesting there. But we’re headed gradually in that direction, Deidre. On the surface of things, it’s so much easier today because of technology to get a very nice pair of secondhand jeans. The idea that they have to be new due to the technology, the distribution that is every day if you drive along the highway, is becoming more and more prevalent, that our capacity for logistics and warehousing as a society. All of these trends play into the fact that we might be trading our clothes around in the future. I also like some trends that aren’t as visible. There are companies that are focusing deeply on making fibers out of sustainably based sources, recycled clothing. I know Levi’s of all companies is redesigning its iconic 501 jeans to include a fiber called Circulose. There’s that circular term in there, which itself is made partly from recycled denim and organic cotton, and credit to a publication called the Sourcing Journal from where I learned this. But a lot of it may not even be visible to the naked eye. There’s certainly some interesting trends of the idea of fashion becoming more circular and less of the fast fashion type of production of brand new clothes rapidly getting them to outlets that seem to be a really prevalent trend just a few years before the pandemic.

Deidre Woollard: Yeah, I’ve been thinking a lot about that because, yes on one hand we’ve been seeing that happen with fast fashion, on the other hand, we’re seeing companies like Shein go crazy. There seems to be this weird thing that’s happening. Two things are happening at the same time. We’re still seeing a lot of fast fashion and yet we’re also seeing this growth in recycling, and I find this fascinating. I think so much of it is driven by social media. But I wanted to talk to you a little bit about where these industries are going because right now it’s not looking good, it’s tough. Resale profitability has been really tough. ThredUP has announced layoffs and the different companies are really struggling with profitability. I think part of that is because there are so many different models. You’ve got different business models. We remember the old-fashioned, the thrift store, the secondhand store, and there used to be the consignment store where that was for the fancy people. Or you would bring your fancy items in and consign them. Those models are being brought on online. You’ve got companies like Poshmark, and Depop, which Etsy bought, those are heavy on that social shopping model. It’s very asset light. But then you’ve got a company like TheRealReal where you have to send the things in, they have to be consigned, ThredUP, where they’ve got these massive use in the bag and you’ve got that whole process where they’re bringing all the clothes there. How is this going to work out? There are so many different business models and maybe none of them have quite figured it out yet. 

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Asit Sharma: I like this characterization of figuring it out because this is exactly what both private and publicly traded companies are trying to do as they build out their businesses in real time. Resale has always been a tough business in the fashion world, but it can be a lucrative one if you can find that magic formula. What’s challenging companies with an inventory model is that they’ve got the inventory cost associated with that, they have to handle the inventory. They have to separate it. On some platforms like ThredUP, they have to present it to the potential buyer. Then you’ve got the fulfillment costs that just eat up the bottom line. Then on the noninventory model side, you have a really tremendous marketing and advertising expense to have that social element get promoted. Then you’ve got the customer side of it, which is enticing people to engage in what’s a modern-day side hustle.

It’s something that for those of us who want to clean up our closet occasionally might have some attraction, but the cost of keeping the customer side, the supply side as well engaged, is also a cost that gets distributed all up and down the P&L. It’s hard to see, but this is part of it. How do you keep people returning to a platform? How do you keep people wanting to sell their clothes and others to keep coming by to see if there’s something new? All of these problems that you would face in a physical environment are exacerbated online. It’s so interesting, Deidre. When you look at the ThredUP, Poshmark, TheRealReal, they all have expanding gross merchandise value. Their platforms are growing. They have expanding revenue.

It’s just that they have not yet found that magic formula that produces positive free cash flow and profits. Not to say that these are bad models, but they’re not going to succeed. But you have to be a patient investor if you’re starting with this. Those really nice ThredUp reports, which I too have been reading for many years, show a market that itself is growing with potential in excess of the actual business models. Lastly, I’m curious to hear your thoughts on this, they’re the unspoken giants, which provide this competition in the marketplace. Goodwill and the Salvation Army, their thrift stores, they get their inventory for free. We drop it off, they put it in their stores. That’s a massive marketplace that always presents a quick and easy and lucrative shopping outlet for many people who may not even have the time to poke around online.

Deidre Woollard: Well, yeah, you mentioned something really interesting there because you mentioned the word side hustle. That is something that is also a huge part of this because we’ve started to see that, you’ve got the Poshmark people, they go to Goodwill. They go to the thrift stores. They won’t tell people which thrift store they go to because they know it’s a good one and so they’ll get them and they’ll resell them there. You’ve actually got a resale market within the resale market [laughs], which just blows my mind. Right now I’m taking a basket approach early on with ThredUP and TheRealReal. Stock prices are low, it’s going to be an unsteady and potentially unprofitable business for a while. Is that what you think about this space, too?

Asit Sharma: Yes. I think you just gave listeners the right approach, Deidre. I love your approach. I think for any theme in investing, it’s a waiting game. Whether this theme, let’s look at 3D printing years ago, or the metaverse, which is a big investment theme today, or resale secondhand fashion, each one of these themes is going to take time to play out. There’ll be winners, there’ll be losers. Your best bet as an investor if you’re really interested in a particular theme, if resale and the circular economy just grabbed your mind, your intellect, and your passion as well, don’t jump in with all your capital, it’s a long-term game and you’ll have time to see which model start to succeed. If you do this regularly, you’ll also get some new opportunities as new companies come public, either through their own IPO process or as in the case of Depop, which you mentioned, which was acquired by Etsy and gives you an avenue to invest in that. But yeah, I would make no changes to your approach, I’m trying to do a little bit of that myself, dabble a bit here in their wild prices a little.

Deidre Woollard: Awesome. Well, thanks for chatting with me about this. Let’s continue to keep having these conversations every couple of months because there’s going to be an interesting one to watch.

Asit Sharma: For sure Deidre. This was a blast, thanks so much.

Chris Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don’t buy or sell stocks based solely on what you hear. I’m Chris Hill. Thanks for listening. We’ll see you tomorrow.

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