Housing Bubble?

[AceHigh]

I'm looking to buy some stock and right now, LENNAR Corp (LEN) and Beazer Homes (BZH) look pretty good to me.

What do you guys think? Do you think the housing bubble is going to hit these stocks soon?

[GeorgeF]

I don't see W or Sir Alan allowing anything bad to happen until after the elections in 2004.

One thing to note is that the US$ has fallen against the euro by about 20%. In other words stocks are not going up, they are being valued in less valuable dollars. Until I see the stock market go up while the dollar does not fall I will not consider the rally 'satisfying'.

[hillbilly]

i've got to think you are late to the party...i missed the entire move myself and feel i should have known better...oh well, i'll not compound the problem by chasing them here at the top or near top.

according to Investors business daily, the home builders have been a fantastic place to be the last 2 years but several have been reporting decelerating revenue and sales growth.

my thinking is alot of mutual funds have big positions they will be wanting to unload into strenghth. the end may come as a climax run on big volume or else new highs on lower volume and distribution days on higher volume. just my two cents.

[AceHigh]

"i've got to think you are late to the party"

That's what I'm worried about. Not so much missing the party, I already have some stock in Home Builders. But I'm looking for places to put some cash, and Home Builder stocks look like the best place to me right now. I was wondering if it will stay that way.

"is alot of mutual funds have big positions they will be wanting to unload into strenghth"

I was hoping mutual funds would be flush with cash right now. People trying to jump back into the market and all. And that might push home builders higher. They still seem under valued compared to S&P500 and tech stocks.

May's numbers were good for homebuilders, again.

[Wildbill]

I will leave it to you to study the companies themselves because I never buy them due to all kinds of weird factors that affect price. I think homebuilders are one subset a psychologist could make money on as keeping a couple steps ahead seems best. But here is my theory.

1. Housing is "overbought". Much like cars, houses have being selling above natural rate satiating a lot of demand. Going forward demand will be weaker than demographics suggest because a lot of future demand is gone with so many move up buyers and first time buyers already in.
2. Traffic and crowding continue to worsen. The demand for in-city places should continue to boom. This means resales will beat out new homes which are obviously not located well to take advantage of this preference.
3. The obvious eventuality that rates go up. Won't hurt the economy much with so many fixed mortgages, but people won't be buying when it means giving up their great loan terms. Don't underestimate this at all, if you are paying $1000 for a place now and in 2 years a move up will cost double because of rate increases, people are just going to stay put. All levels will become semi paralyzed hurting everyone. The upshot is fewer buyers but also fewer sellers so prices won't go anywhere just stagnate.

These 3 things lead me to believe home builders are likely to hurt, but home owners probably will not lose much value unless they are forced to sell. There won't be much supply because people won't be moving or see incentive to put their home up in a tepid market with few buyers. Unless you see good reason to think a particular builder can avoid these factors, I would steer clear.

[AceHigh]

Good points.

OTOH, why has the home building sector been doing so good for so long? Low interest rates?

From what I understand a lot of factors are favoring the bigger home builders over the small, local home builders at this time. I think this will continue to be true and will squeeze out the small time home builders. Does that change your analysis at all?

[Wildbill]

Hey no telling when it will happen, just that it will at some point. People don't buy houses because they are cute to own or because they are a fad. However we could be in this decent housing market for some time.

As for large builders, well of course they have an edge. First of all remember that almost all subivisions are fairly large to be solid successes. Only the big boys can ante up the money to get a big project going. Big projects are best because they spur other things. Want a park or supermarket to open near your new house? Well better live somewhere that can support it. A smaller builder just can't draw the other amenities that create planned communities or new retail. Big guys get those an also have the means to buy the best lan for projects. When it comes own to it small guys are almost like designers or architects, not the well oile machine that can pump out big margin homes that people still want despite the fact that 20 of their neighbors live in the same exact house!

Still this theory of mine will hurt all builders. People can only move so far and be happy. The concept of hour plus commutes isn't decades long practice in most areas and for good reasons. So that trend I feel very certain of, that close-in stuff will be most in demand lowering the premium the home builders can get away with.
If you have fewer buyers and more resale demand, that has to be an argument against future growth, but not a certain one. Once again look at things this way but then do your homework on how exactly this fits with each company. Builders have done well quite simply because homes have been going up fast meaning lots of revenue, but what's more, the builders had land in inventory and got margin through appreciation of their land holdings. Now land is getting expensive so one more way they could lose out in the growth struggle.

[Aragorn]

I think housing prices are high, but I don't know if there is bubble. It still seems like population is growing faster than the housing supply

[Wildbill]

That is actually a hard number to guess. The problem has been the changing demographics with more unrelated persons living in the same place, whether just roomates or a couple, and also the trend to much larger houses kind of skews things in the demand curve.

1. The trend towards people living together outside of being a family unit makes it difficult to say how much capacity there is in the housing world. After all in NYC people might view an apartment or a shared apartment arrangement pretty complementary choices, whereas in say Tulsa people rarely would view the two the same.
2. Bigger houses skew the demand curve because they change the demand for more space. Used to be a family bought a modest house, say 3 bedrooms and then needed to move up to a bigger house as they had kids. New housing stock is mostly built with enough space so that the demand for a new house on space considerations alone isn't really a factor. Housing used to be bought as a need, now its often done for investment reasons where a couple is fine in their current home but choose to buy another because they see value appreciation being likely. This changes the demand as well.

I agree a bubble is probably not the situation faced, especially on a macro view. There definitely are communities and areas of the country that have bubbles and will lose value in the next say 5 years. However there are also likely to be other parts of town with no such drop. People would be wise to keep this under consideration, realizing that the mid and high end stock are always much more likely to lose value than the lower stock of housing.

[adios]

"Do you think the housing bubble is going to hit these stocks soon?"

The concept of some ubiquitous housing bubble is laughable really. Real estate prices differ from locality to locality with different factors affecting them. Past history has shown that real estate doesn't behaive as common stocks do. Housing prices in Cedar Rapids, IA differ a lot from housing prices in San Diego, CA for some very explainable reasons. Is there a housing bubble in Cedar Rapids? Is there one in San Diego? Is there one in San Diego only? The question is where do these builders build. Their story is that the demand for housing is far outstripping the supply and they have the inventory of land available to do new building on. Where are mortgage rates headed during your holding period? These are question that I'd be asking myself.

[AceHigh]

"concept of some ubiquitous housing bubble is laughable really."

Here's an article with Greenspan talking about it.

http://cbs.marketwatch.com/news/story.asp?guid=%7BCC5247AB%2D467B%2D4599%2DADA1%2D 8AC86A045D9B%7D&siteid=mktw

[AceHigh]

I'm not so much talking about the prices of houses, but the earnings of house building companies/stocks.

Home builders are benefiting from the low mortgage rates, that may allow them to charge more for houses. Talk is the Fed is likely to lower rates at the end of June and that will lower mortgage rates.

[Wildbill]

Well its not really laughable, its a reality that there are bubbles out there. The concept of a nationwide bubble is quite dubious, but localized there almost certainly are bubble spots because housing prices can only be a function of local incomes. People might pay a higher % of their income to live in desirable areas and desirable areas might have higher incomes that fuel the higher prices, but the bottom line is people can only pay so much and then the banks will tell them no. Even worse is the glut of houses that could hit the market and cause localized havoc if prices get to high. Just study what happened around LA around the 89-93 period, the economy was soft, the local industry took some heavy shocks, the demand from Asia began to dry up...it got really ugly. Sure it eventually bounced back, but to many people they don't have time to ride out shocks. What can happen in a place like San Diego is a short term shock, say a big employer or two moves away or does big layoffs. Then it reverberates in the local job market, these people cut back on their spending and the local businesses see drops. This leads to a sense of uncertainty in which people stop buying new houses or even worse just exit the area. With no buyers and plenty of sellers people start lowering the price of their houses. Since the writing is on the wall that housing is finally done going up a bunch of others waiting for the moment to sell try entering the market. Many will see they lost a little value and wait it out, but some will say lets get what we can. Prices go down. As prices go down, those that waited start one by one saying screw it, lets get what we can (almost like a short squeeze). With few buyers out there, there is little activity but a lot of inventory. Then it gets scary. Appraisals start coming in on houses and people realize they have gone down. Since the job market gets worse, more people are getting in trouble with their ridiculously stretched out mortgage. Want ridiculous, my mother lives down there and tells me about her staff member who makes about 50k, her husband makes about the same, maybe a little more, but they have a 450k mortgage for a rather modest 3 bedroom house. You figure their net take home is probably about $4500-5000 a month and their payment has gotta be over 2k. If either loses a job they are finished paying their mortgage unless they quickly get another job. These types of people are there by the thousands, having bought in the last 2 years. If this scenario keeps playing out there will be thousands of underwater mortgages and inevitably those keys are going to get handed in and then the banks, notorious for lowering the market with lowball prices, will just further burst the bubble. People can say there is demand all they want in San Diego, there is a very serious bubble there, a shocking bubble. A good mid-level manager down there struggles to make 75k as the salaries are hideously low relative to the cost of living, yet the housing is on par with NYC area prices. Boston is very similar. I did research on a similar job as mine, I make more money in Las Vegas than I would in San Diego, how is that for wacky! Sure there is cachet to living in some cities and there will never be a halving of values, but it doesn't take much to cause real havoc with people losing houses and moving out of an area as a result, creating a further spiral as the economy shrinks. Seattle is just starting to see such a story with housing values going down amid accelerating unemployment, Denver looks to be on the verge of a similar scenario as well. Two cities that seemed to have insatiable appetite for houses and endless job growth are not just stagnating but turning into economic disasters, a good deal of it driven by an opposite direction housing market after sustaining an initial employment shock. If prices are down 10%, but volume is down 50%, that is a housing market disaster and I think its just about inevitable for quite a few places in the next 3-5 years. Maybe not Cedar Rapids though.

[scalf]

/forums/images/icons/blush.gif wb..

i'd be cautious about vegas real estate...sounds funny, but stranger things have happened...gl

but how will it play in peoria...lol...jmho...gl /forums/images/icons/grin.gif /forums/images/icons/club.gif

[Aragorn]

On Vegas, I keep wondering when water issues will bring growth to a crawl. There really isn't enough to go around. If that happens, one of two things could happen to property values. 1) A water shortage could hurt values as it affects lifestyles. 2) They put curbs on growth that lead to exising properties going up in value.

Interesting situation.

[Wildbill]

Don't bet on either. People have been saying this about Phoenix since 1980, that the Salt River and their other projects were created with half a million people in mind and here they are going on 4 million. Bottom line is there are ways to create more water, mostly through conservation. I think the 3 cities here (Boulder City doesn't have growth so its not an issue for them) and the county council are all getting closer to where they either severely limit or ban grass. Simple enough. Also there are strains of grass that need about about 20% of the watering as normal grass that many people still use. One of the numbers maybe 5 years ago that was worrying was the boom in golf courses, but that idea has died out quickly as golf-course homes have become less in demand and the number of golfers has flattened. In fact there are plans for 2 courses to be closed and used for housing land, anther 2 could follow soon. Golf courses can use up the water supply of 300 homes, sometimes more. And don't ever forget the power of technology, especially with recycling water. As it gets better recycled water will become a bigger part of the water system with it being used for watering as well as in things such as car washes and large pools, all very popular things out here and very big users of water. When it all gets down to it, the use of water for the basic needs of survival is quite a low amount. Its these amenities uses that can get an area in trouble, yet can be modified most easily.

In general I think the housing values are going to boom very soon here for reasons other than water. There is a natural sense of place here, being in the basic "valley". Well the valley is just about done and filled out now, there are only narrow swaths of land left within say 12 miles of the Stratosphere. As you get out of that area, the prices for anything inside the core will go up. For now the prices of things on the edge of the core are the highest, this town has always been a place where living far away had its premium. Now that we have a beltway and the growing traffic problems, there might become a premium for living near or inside the beltway, as it exists in quite a few cities where sprawl has hit and people start desiring easier commutes and proximity to amenities. I made such a prediction and investment by helping a buddy buy a house in Scottsdale about 7 years ago and taking a 15% equity in it (I even considered moving there myself but came to my sense fortunately!). It was a no brainer to me, with Phoenix growing like crazy and new houses being 25 miles from downtown in some cases, I figured a close in location with good schools and easy access was a slam dunk, and sure enough it was. The house I got equity in has appreciated almost 150% in those 7 years, while Phoenix as a whole has gone up closer to about 40% in that timeframe. There still is plenty of land left and building will continue, but that close in location will continue to outpace the market. I think in Vegas that same thing will start happening soon as it will in a lot of other cities where growth starts pushing the boundaries of what was originally thought to be the metro area.

[AceHigh]

Home Builders have been taking a little bit of a down turn since I posted this.

The following report says housing should be strong for the next 10 years.
http://cbs.marketwatch.com/news/story.asp?guid=%7BAAD2E189%2D2D2B%2D464F%2DB920%2D BE8A8948AB9E%7D&siteid=mktw