Facts & Trends: Housing Stocks: Buy Low, Sell High

The Great American Housing Rebound<br />
Illustration by Andres GuzmanOn Jan. 3, 2012, I suggested that U.S. housing market fundamentals had turned positive, that house prices had bottomed and that housing would soon become a positive contributor to the economy, employment growth, retail sales and bank balance sheets.

As Don Coxe would say, the housing recovery story has clearly moved from page 16 to front page one year later as this weeks BW cover illustrates.

Several signs are now suggesting that investors should carefully review their positions in housing-related stocks.

Not that the fundamental story has changed for the worse. Demand is gradually strengthening but the real trigger is tight supply, pushing prices higher. Rising house prices often tend to be self-feeding, especially when affordability and pent-up demand are high like today.

Supply is clearly extremely tight just when we are entering the seasonally strong spring period: new and existing housing inventory is exceptionally low, distressed house supply remains constrained, delinquencies are falling rapidly and will fall even faster as prices rise and builders are only slowly ramping up new home construction.imageCalculatedRisk

However, markets being what they are, valuations of many housing-related sectors have risen to such levels that the risk/reward balance has totally turned upside down in a little more than one year.

First evidence: lumber prices are back to their 2005 levels and clearly at the high end of their cyclical range.

Yet, housing starts are still at the bottom of their historical range.

FRED Graph

Low lumber supply and excess liquidity often result in such aberrations. Lumber production always collapses along with prices. It also always recovers along with prices. Spring is just about there, so expect much busier North American lumber mills in coming months.

Meanwhile, high lumber prices will undoubtedly erode builders’ margins.


“Buy low” was 12-18 months ago. No longer. Homebuilder stocks are not near their 2005 peak but why would they go back to that bubbly era?

Bespoke Investment

I present three Morningstar/CPMS charts since 1990 on homebuilders price/book (red) and ROE. How lucky do you feel?

KB Home




Toll Brothers


Looks like “sell high” to me.

How about all the funds buying distressed houses to rent them? Pretty soon, renters will prefer to buy and the funds will seek to sell out. More supply.

imageJ.P Morgan

Here’s what one of these funds is doing in North Carolina (California billionaire bets on rentals with Wake home-buying spree via CalculatedRisk)::

(…) “They didn’t ask us to fix anything, either,” said Creswell, 35, a pastor at a Wake Forest church who has flipped six houses since the market crashed in 2008. “They just bought it. It was the easiest housing closing I’ve ever been a part of. … They were a dream buyer.”

The dream buyer is American Homes 4 Rent, a Malibu, Calif., company that since late December has paid nearly $13.3 million in cash for 81 houses in Wake County, according to property records. The company, which formed last year, is one of several firms hoping to profit from rising home prices by amassing thousands of single-family homes across the country and converting them into rentals. (…)

What’s noteworthy about American Homes 4 Rent’s buying binge in Wake County is that it isn’t just targeting distressed properties, or even existing homes. About a third of its purchases have been new homes acquired directly from homebuilders.

“Very reasonable offers, they’re not trying to low-ball us,” said Dan Cunningham, of Brandywine Homes, which sold a house in the Braemar subdivision in Zebulon to American Homes 4 Rent for $152,000. “I mean, I don’t understand why they’re buying new homes to rent, but that’s their business model, I guess.” (…)

Institutional investors have invested at least $5.4 billion for purchase of single-family rentals nationwide during the past 18 months, according to Barclays, and an additional $8 billion is expected to be invested within the next couple of years. American Homes 4 Rent’s buying spree is being financed in part by a $600 million investment from the Alaska Permanent Fund, a $45 billion fund that invests royalties the state collects from oil companies. (…)

“Usually an investor will come in just at some ridiculous number you can’t deal with,” said Jeff Murdock of Murdock & Gannon Construction, which sold three new homes to American Homes 4 Rent in the Carlton Park subdivision in northeast Raleigh. “But these guys weren’t that way, bless their hearts.”

Sounds like too much money seeking a home. If I were an officer of the Alaska Fund, I’d be worried.

Want to own REITs or timber stocks? Good idea! A bit late, however:

imageJ.P Morgan

How about hardware stores? No pure plays and no great bargains but they sure look less risky to me. At least, their ROE’s are pretty good.

Home Depot




Banks are even less risky, if they can restore their ROEs…Higher house prices and a positive yield curve would obviously help.

Wells Fargo


J.P. Morgan


Bank of America





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