Buy a Land Bank for 30% of its Fair Value. PE of 6. Historic Growth of 30%. With a long runway for growth at 15%.

And backtesting John Neff along the way.

I recently read John Neff on Investing, which was published at the peak of the dot-com bubble amid lofty valuations (sound familiar?). In the final chapter he talked about a few industries that he saw potential in.

"Bargains have not vanished entirely from the less-recognized growth sector. Many stocks of home builders feature price-earnings ratios more than 75% below going market multiples… Lust for one's own piece of turf still beats heartily in virtually all Americans who will either buy homes for the first time or move up to more luxurious homes. Thanks to the advent of large regional and some national home builders, housing may turn out to be considerably less cyclical, and multiples will expand in tandem with greater earnings. These publicly owned home builders enjoy at least three basic advantages over fragmented, mom-and-pop home builders (1) better availability of credit even if credit tightens, (2) enough clout to compel price concessions from suppliers, and (3) sufficient resources to exploit expensive technology… And don't forget that big home builders can command the loyalty of plumbers, carpenters, and electricians as markets become more competitive for these tradespeople.

These are some of the several indications that home builders behave less like cyclicals and more like less recognized growth stocks… I'm among the minority who think that these stocks will behave more like less recognized growth stocks than like cyclical stocks. Not everyone agrees. Therein lies the opportunity"

If you had taken his advice and invested in the top 5 homebuilders by market cap at that time: DHI, LEN, Kaufman & Broad (KB Homes), Centex Corp (Bought by Pulte) and Pulte, you would have returned double the CAGR of the S&P 500.

Fig 1. ROI of homebuilder stocks 2000-2025

Note that this return is even after CTX got caught up in the mortgage bubble with large financial liabilities in its financing division. And still, even after losing half of its value from 2000-2009, you still grew your investment 5x. This is because CTX was bought by PHM using company stock in 2009, and PHM appreciated 10x (My value for CTX in the table above is in reference to its converted PHM price, not actual CTX price).

History has validated John Neff here. Homebuilders have been neglected growth stocks.

Notably, this list does not include NVR who pioneered an asset light model where homebuilders don't buy and speculate on plots for homes, but instead have option contracts with land developers for prospective home plots. In this model the land developers have land on their balance sheets and are stuck with the slow work of preparing the plots for home building, while builders focus on building. Since 2000 the industry has heavily moved towards the asset light option contact model.

And since 2000 home builders have consolidated. There are less players and overbuilding has been greatly curtailed. That is to say that homebuilders are less speculative than ever.

Fig 2. Consolidation of the homebuilding industry. Source: https://eyeonhousing.org/2024/07/top-ten-builder-share-declines-in-2023/

Homebuilders are also building less than ever, and have lower leverage than in recent history.

Fig 3. Home starts are historically low, home builder leverage is also at record lows. Source: Millrose investor presentation

Low starts have contributed to an overall housing shortage, which makes for a tight market.

Fig 4. The US housing market is significantly undersupplied. Source:

https://www.resiclubanalytics.com/p/housing-analysts-think-housing-shortage-last-yearsthis-real-estate-ceo-isnt-sure

New lots to build homes on are similarly undersupplied.

Fig 5. Lots available for home construction are also very low

Source: https://eyeonhousing.org/2024/07/top-ten-builder-share-declines-in-2023/

All of this is to say that home builders have a strong underlying demand and a structural tightness that should continue to support their pricing and margins in the long run. .

Fig 6. Homebuilder average gross margins. Source: Millrose investor presentation

All of this would also suggest that without major signs of a "boom" cycle, any "bust" cycle would be shorter and of less magnitude.

Overview of Major Home Builders

NVR and DFH - Entirely option based land development.

DHI - Has a captive land developer (Forestar) that develops plots primarily for DHI as option contracts.

LEN - 60% of their lot pipeline is controlled via options. In Q1 of 2025 LEN spun off Millrose properties (MRP) as a REIT but is structured like a landbank. The business model is that Milrose holds the properties on their balance sheet, while Lennar develops them, and receives "income like rent" from the options fees that Lennar pays on the option contracts. When Millrose sells the properties to Lennar it uses the proceeds to buy and develop land, thus "recycling" the capital.

Millrose earned 64.8M in Q1 of 2025 on its book value of ~6B. This is an annual yield of about 4% that is returned to shareholders. Millrose works exclusively with LEN currently. It can't really compound its book significantly, and it sells at 80% of book. It's an interesting business model that benefits LEN, but I don't think it is worth investing in.

Tolle - Vertically integrated homebuilder. 45–55% of lots are optioned.

Pulte - Vertically integrated homebuilder. Focused on luxury homes in high value markets, 90% of land is owned.

In any case, each of these land developers have to get their developed lots from somewhere, so which is the best land developer in the industry? Can we find one that is advantaged and priced right? I think so…