Why I'm Wary of Most Housing Stocks, Except This One

I've been writing about the ailing housing industry for a decade, and it just doesn't seem to improve.

The median price of a home hit a record $440,600 in June, and the average 30-year mortgage rate, at 6.7%, is more than double what it was five years ago. So many Americans can't afford a home, and many current homeowners, including my wife and me, don't want to move because doing so would double the 3% rate we enjoy on our current mortgage.

And that's why home sales across the nation are struggling -- in a big way. The National Association of Realtors says existing home sales fell 1.7% in July, from the previous month, following a 2.4% decrease in June.

There's a major housing shortage

Zillow says there's a national shortage of 4.7 million homes. Part of the reason for this, my research tells me, is that the Great Financial Crisis of 2007-2008 decimated the home construction industry, and it's never quite recovered. That's exactly why I'm avoiding almost all housing stocks.

But there's one exception to this rule: Legacy Housing (NASDAQ: LEGH). This isn't an ordinary homebuilder. Instead of building homes on-site like PulteGroup or D.R. Horton, Legacy manufactures homes in factories and then delivers them to the site for assembly. It also makes tiny homes.

And Legacy just had a banner quarter. Revenue in the second quarter rose 32% over the same period a year ago, to $66.3 million, and net income soared almost 59% to $23.5 million. Earnings per share of $0.99 was 62% higher than a year ago. Those impressive figures are why the stock is up about 45% year-to-date.

And I think manufactured housing has a huge future -- for several reasons. First, there's the massive housing shortage, which is exacerbated by all kinds of zoning and land use laws that make it difficult to build new homes. Something has to fill that gap.

Plus, manufactured homes are significantly cheaper than those built on-site. The average manufactured home costs about $120,000, a price point many more Americans can reasonably consider. Plus, the stigma that once attached to so-called mobile homes is giving way to new ideas, as manufactured homes these days are much nicer than they once were (and are often indistinguishable from on-site homes).

Image source: Getty Images.

Finally, Congress recently passed legislation, the ROAD to Housing Act, that clears many hurdles to both building and financing new manufactured homes.

To be sure, Legacy is not a huge company. In fact, it's a small-cap stock, and its market capitalization of about $690 million is dwarfed by major homebuilders like PulteGroup, D.R. Horton, and Lennar. But I think that differential will shrink as manufactured housing grows to fill the housing gap.

Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends D.R. Horton and Lennar. The Motley Fool has a disclosure policy.