Homebuilders historically "trade" at a lower PE than many asset classes since the dawn of time-many of them go bankrupt or get bought out during the inevitable cyclical retreats of housing. The cycles of ebb and flow can last for years, and often earnings are depressed for extended periods (years). These are not exactly Proctor and Gamble staple products...and Wall Street knows it and rewards it appropriately. There will always be a longer term housing shortage....but don't confuse short term bubble hysteria will the more grinding but steady population demographic baseline demand. You have been reading too many Hovnanian press releases.
Back to the world of reality: U.S. Housing Activity Up 4.7 Pct. in Jan. Construction of new homes and apartments rose 4.7 percent in January to the highest level in over two decades as low mortgage rates continued to power the nation's housing industry. The January increase caught economists by surprise. They had been forecasting a decline of around 3.7 percent, reflecting rain in the West and winter storms in the East, which had been expected to hold down construction activity. Instead, builders, enthused by continued low mortgage rates, broke ground on the largest number of new homes and apartments since February 1984 when construction starts hit an annual rate of 2.26 million units. And in a sign that housing activity should remain strong in coming months, applications for building permits rose by 1.7 percent to an annual rate of 2.1 million units in January with permits for single-family homes up 0.7 percent and permits for apartments rising an even stronger 5.3 percent. ----------- Toll Brothers: Oh how easy it is to print money.
there are record numbers of homes being purchased for investment. Many of these are being rented out for LESS than the mortgage payment on speculation capital gains will continue to be what it has been. Many of these homes are even vacant. The low cost of money and 10%+ appreciation means you dont even need a tenant to make a profit. 2004 homes purchased for investment were DOUBLE 2003. A staggaring statistic. In las vegas the number of homes on the market jumped from 3,000 to over 18,000 in about a months time when speculators all dumped at once when they heard of the price drops. The housing market can litterally turn on a dime as it did in Vegas. There may indeed be a housing shortage, but that doesn't mean that there won't be a short period when prices come crashing back to earth.
Almost every homebuilder has 2 or 3 consecutive quarters of much lower unit orders. The year over year numbers always look impressive. But if you examine it closely, what really happened is that the homebuilders had huge growth in early 2004. Since then it has cooled off. The big earnings numbers for the last quarter was based on the huge orders in Q2 when the nation was in a crazy sellers market just before the fed started rasing rates. But now ARMS are 75 basis points higher and most of the country with the exception of Arizona, FL, and DC is now a buyers or neutral market. The HB's are all saying that Q4 2005 will be better than Q4 2004 was. This only happens if they get another huge surge in Q2 2005 orders. This is likely to only hapen in Arizona and Fl. All other areas have stagnant prices and the flipping game is OVER. Watch for Q1 and Q2 orders from the HB's. Many will likely show declines versus 2004. That is my take.
I guess you didn't get a chance to read Toll Brothers (TOL) earnings report prior to writing this post. They release this on February 8, 2005: *************************************** The Horsham, Penn.-based builder of luxury homes said homebuilding revenue for the quarter ending January totaled $989 million, or 1,590 units sold, up 68 percent from $589.6 million, or 1,085 units sold, in the same period a year ago. Analysts surveyed by Thomson First Call had been expecting revenue of $940.51 million, on average. Revenue growth was strongest in the Northeast at 92 percent, the Southwest at 90 percent and in the West Coast at 69 percent. Contracts increased 60 percent to $1.44 billion, or 2,173 homes, from last year's $902.8 million, or 1,512 homes; while the backlog at the end of the quarter grew 66 percent to $4.89 billion, or 7,292 homes, from $2.95 billion, or 5,079 homes. Merrill Lynch analyst Lorraine Maikis had been projecting new orders of 1,710 homes and backlog of 6,944 homes. "Our record backlog and contracts indicate that demand for out luxury homes remains very healthy," said Chairman Robert Toll. As a result, Toll said the company was "on track" to reach its fiscal 2005 target of 40 percent earnings growth. ******************************************* The facts sound somewhat different than your post. Oh, and by the way, while ARM's were increasing 75 basis points, 30 year fixed rates were droppping. And in case you're wondering, the 30 year fixed rate is still by far the predominant mortgage in the market these days. OldTrader
Benchmark level to average 6% in '05, Freddie Mac economist says There's an article over at CBSMarketwatch.com in the real estate section titled "More can afford homes in Q4" with the summary just below it: "Rising incomes and falling interest rates help U.S. homebuyers overcome price pressures." This sort of news goes against the "Housing is Freakin' Doomed" crowd who say houses are priced beyond affordability.
Like i said, the year over year comparisons look rosy. But TOL's earnings were based on orders received in Q2. Orders were down in Q3 and Q4 from Q2. Some of this is seasonal of course. My point is that while first half 2005 will be stronger than first half 2004. It is very much in question whether 2'nd half 2005 will be stronger than 2'nd half 2004. Everything with HB's is 6 month lag. Not sure about TOL, but I'm worried that many of the HB's won't see the same spring order surge that they did last year. Then estimates for 2'nd half 2005 will come down. Most of HB's are saying bulk of profits will come in 2'nd half of 2005. They are saying they will get an orders surge equal to last spring. Market dynamics seem different this year. I.E. las vegas and california soft where much of profits came from last year. We will find out in 3-6 months.
I'm enjoying the back and forth on this topic, but what I don't understand is just where are all the buyers for these homes coming from? Wouldn't the demand pretty much be limited to population growth? And who is buying all the homes these move up buyers and people moving to Florida are selling?
Unless the 30 year yield is also priced beyond affordability, as Greenspan has been reminding us every chance he gets. The market will figure it out. Martin