The stock market “knows”: housing is back. The old rule of thumb about housing stocks was that they should be bought at or below book value in a downturn and sold at twice book after a boom. Of course, when they peaked way back in summer 2005, some were at triple book. Citigroup’s housewares analyst turned housing expert Stephen Kim proclaimed a new era in housing stocks, due to their (alleged) conservative and brilliant land acquisition policies, supposed limited over-expansion possibilities and what turned out to be all sorts of drearily familiar “new era” balderdash.
What people forget is how long housing stocks wandered in the wilderness before that. I distinctly remember boring Mrs. DoctoRx back in 1999 and 2000 with the following comments: I would say that if the stock market is so prescient, then our future is that we are all going to live in hovels but we’ll have lots of great electronic gear. Those were the days when housing companies grew their earnings slowly, sold above and below book value and at single digit P/E’s at the same time that Cisco was trading persistently at 150X earnings and Yahoo! was headed for an insane peak of 100X sales per share. I remember buying TOL coming out of the tech-wreck recession at $20, which was book value, while earnings were surging but no one was watching.
We now see a stream of people calling the bottom in housing. ( Calculated Risk provides a summary.)
I don’t doubt it, but I have two major concerns. One is that the housing stocks are a bit frothy already. This reminds me almost exactly of what happened to the NASDAQ by 2006-7. The bulls were right, but boy were they early! The (limited) history of bubbles in important asset classes such as high technology and houses is indeed that after they crash, they turn into average investments for some years to come– but not great ones as a class. So there’s been no rush to jump back into the sector unless one could pick the bottom- which occurred a long time ago by now. Some post-bubble/post-crash stocks of course become like AAPL and soar, others such as MSFT, CSCO and ORCL mostly hang around, and others turn into NOK and lose their mojo. I would expect something similar out of housing stocks.
The other concern is the classic Misean concern of that which is unseen. I think that most of us at this site are underwhelmed by seeing rents rising and housing prices stabilize. What else would you expect when the most important economic power the world has ever seen– the U.S. government with the most powerful central bank ever seen in full support– expends years and trillions of dollars to cushion the crash? Remember that housing prices peaked around the end of 2005. A lot of time has gone by.
What is not seen as a result of this immense effort to prevent a bigger price decline, a Federal effort which dwarfs the Apollo program, is all the productive effort that did not go elsewhere as a result of all the monetary inflation, support of weak financial institutions, and the like that has been required to simply make it now finally look as though a national bottom in prices has finally been seen. Well, inflation is official U.S. policy– so ending price deflation is simply a dog bites man story. It’s really not news.
What I think probably ends up happening is that once the banks’ balance sheets are made whole enough to satisfy the regulators, the Feds will shift their financial attention elsewhere, start withdrawing their extraordinary support, and thus leave housing struggling with its demographic and remaining financial problems. It’s a sort of love ‘em and leave ‘em phenomenon that has happened over and over. Why it should not happen again is obscure; I think it will, to one degree or another.
I think that Robert Shiller, who holds a very cautious view of the long-term financial future of house prices in the U.S., is en pointe. This view of his is in my opinion already at variance with the over-exuberant prices of home-building stocks. Despite being a Keynesian, Dr. Shiller nonetheless is a very, very smart observer of the financial-economic scene. I’m not aware of a time when it has ever paid to take a macro financial view opposed to his, and thus I’m waiting for housing stocks to parallel what happened to tech stocks in 2008-9, which is to become collateral damage in a stock market downturn in which housing is not a prime mover. What the cause(s) of that next important stock market downturn will be– if one occurs any time soon– is not known, but I sense that patient investors should wait for the fat pitch in this sector rather than chase stocks that have moved a lot already based on improving order books coming off of the greatest depression in housing in 75 years, if not of all of American history.
As a trader of 44 years, I must say, that is a really good Article!
Yeah good piece, Doc.
If housing prices continue their slow slide, these stocks could rush down a lot faster than they crept up.