Thursday, June 22, 2006
Why US real estate is Poised for Explosive Growth
This is a lengthy read, but well worth it.
To summarize:
The article I’ve pasted from “Growth Report” again substantiates the actual facts that we’ve mentioned which have:
a) driven US real estate in the past 3 yrs to record home sales, starts, and prices;
b) the reasons why we’ve seen a short correction and temporary cooling in previously hot sectors; and
c) why US - particularly Florida real estate - is poised for continued phenomenal long term growth.
Remember, we focus on Fact…not hype…and the Law of Supply & Demand is what drives this industry, property values, and the equitable profit we achieve. Satisfy your curiosity and read this important knowledge now.
It could just help you select the next market you’ll retire to, or invest in...Cape Coral, Florida real estate anyone?
====================================
By Nancy Zambell, Staff Writer, Big Idea Investor
In the past three years, the U.S. has experienced a housing boom that has not been seen since the aftermath of World War II when soldiers returning home fell head-over-heels in love with home ownership.
From coast-to-coast, home prices escalated beyond imagination, easily tripling in some markets like Washington D.C., South Florida, California and Phoenix. There were multiple reasons for the "perfect storm" of real estate appreciation.
============
First, real estate became a safe haven from the tumultuous stock market that came after the tech boom and bust of the last decade.
Second, low interest rates, which bottomed at 1% in June 2003, gave rise to free flowing mortgage money and the ability to buy and build much larger homes for the same monthly payment of yesterday.
Third, the 78 million-strong baby boomers population, many with overflowing coffers from their big salaries and prior good fortunes in the stock market, traded up to 5,000+ square feet McMansions that would have housed three generations in our grandparents' time - pushing up housing prices across the industry. The last American Housing survey, in 2003, found that nearly 3.2 million homes in the U.S. were 4,000 square feet or more - up 11% since 2001. And fourth, the rush to buy second homes and speculative investment properties and vacation homes for baby boomers created bidding wars in major cities and desirable vacation hot spots alike.
And not only did housing prices go to the moon, so did the stocks of the home builders and related sectors - to the tune of more than 30%, on average. Early investors were indeed very happy!
But beginning in the autumn of 2005, the bloom came off that rose.
The rise in interest rates first caused prospective homeowners to scale down, since larger houses became out of reach. Coupled with the reduced liquidity from the lackluster stock market of the last couple of years and the slower economy, the housing market has been slowly putting on the brakes.
Housing sales started softening, even in the "hot" markets with days on market, a measure of the number of days a house or condo is on the market before being sold, in places like South Florida lengthening from mere days or weeks to 3-4 months, and growing by five times in some markets.
My best friend decided to sell her Palm Beach County, Florida home last November; unfortunately at just the wrong time. As soon as she listed, eight other homes in her neighborhood went up for sale. Then, prices began to fall, a theme that is being played out in most of the regions across the country that saw the highest appreciation.
In the first four months of this year, according to the National Association of Home Builders and the National Association of Realtors, the volume of newly built homes sold fell 11.2%, while sales of existing houses fell 5.7%. The home builders expect housing starts to fall 13% this year, with new home sales forecast to drop about 9%. The result of this lessened demand is a drag on prices and ultimately, lower earnings for the home builders. Already we are seeing companies and analysts reducing earnings forecasts. So it's no surprise that the shares of the home builders have taken a beating lately.
But all is not lost.
While the age of the McMansions may be faltering, there is light at the end of the tunnel for more reasonably-sized and -priced homes.
After all, people still need a place to live.
Mid-market housing is continuing to thrive.
Many baby boomers have decided that taking care of a palace is not that much fun - or cheap! A large contingent is setting its eyes on retirement, and spending their golden years married to an oversized home is just not on these folks' agendas.
Not to mention the double-headed negatives of rising energy (12% boosts in electricity and 43% in natural gas heating costs, in the last 3 years) as well as increasing mortgage costs.
The change is upon us.
The inventory for $1 million-plus homes is averaging 13 months in several regions, more than twice the overall days on market. In Dallas, Texas, sales of 4+ bedrooms homes in the first quarter of this year fell by 31%,
yet sales of smaller houses rose 23%, a positive barometer for future gains in this market.
After all, the next generation coming up after the boomers is just about the same size, and they will all need a place to live, albeit a more modest one than their parents'.
Perhaps that is why the big funds, the insiders and the short sellers are not bailing out of this segment.
In fact, several privately-held home builders have recently been acquired, and at premium valuations. And as you can see from the table below, the change in insider and institutional holdings at the largest of the publicly-traded companies is fairly negligible, and in some cases has actually increased.
Likewise, the shorts have not been betting against the industry to any large extent.
But the result of the media slams and adverse Wall Street reports, which caused the retail investors to jump out, is perhaps, a good contra-indicator for savvy investors.
Just look at the price-earnings ratios of the builders below. When was the last time you saw P/E's in the 4-5 range?
We are rapidly concluding that many of these builders have been or are close to being oversold, and several even look attractive at these valuations.
Industry Toll Bros. (TOL) Centex
(CTX) Beazer
(BZH) DR Horton
(DHI) Pulte
(PHM) Hovnanian
(HOV) Lennar
(LEN) KB Homes
P/E 14.3 5.3 5.4 4.7 4.9 5.0 4.1 5.2 4.3
P/E Hi 5 yrs. 22.7 17.5 n/a 22.8 11.8 n/a
13.7 11.7 12.2
P/E Lo 5 yrs. 7.2 5.6 n/a 4.9 5.3 n/a 4.5 5.6 5.1
LTD/E .87 .72 1.21 .87 .82 .55 1.18 .56 0.0
Chg. In insider holdings 6 mos. n/a (.3%) (16.7%) (17.5%) 0.0% 0.0% (.9%) (1.1%) (1.9%)
Chg. In institutional holdings 6 mos. n/a 2.4% (2.0%) (9.8%) .5% 4.5% 11.2% (4.4%) .6%
Chg. In short interest 3 mos. n/a (7.3%) (10.5%) (14.3%) (2.2%) 36.9% 10.1% (.24%) 5.6%
While we are not yet recommending any of the builders, we will be watching them in the coming weeks and month, especially those with growing institutional interest. We are not expecting a return to the tremendous run-ups their shares saw in the last couple of years, but we also think there may be room to bottom-feed very soon, picking up some shares at very attractive prices. Stay tuned for more.
To summarize:
The article I’ve pasted from “Growth Report” again substantiates the actual facts that we’ve mentioned which have:
a) driven US real estate in the past 3 yrs to record home sales, starts, and prices;
b) the reasons why we’ve seen a short correction and temporary cooling in previously hot sectors; and
c) why US - particularly Florida real estate - is poised for continued phenomenal long term growth.
Remember, we focus on Fact…not hype…and the Law of Supply & Demand is what drives this industry, property values, and the equitable profit we achieve. Satisfy your curiosity and read this important knowledge now.
It could just help you select the next market you’ll retire to, or invest in...Cape Coral, Florida real estate anyone?
====================================
By Nancy Zambell, Staff Writer, Big Idea Investor
In the past three years, the U.S. has experienced a housing boom that has not been seen since the aftermath of World War II when soldiers returning home fell head-over-heels in love with home ownership.
From coast-to-coast, home prices escalated beyond imagination, easily tripling in some markets like Washington D.C., South Florida, California and Phoenix. There were multiple reasons for the "perfect storm" of real estate appreciation.
============
First, real estate became a safe haven from the tumultuous stock market that came after the tech boom and bust of the last decade.
Second, low interest rates, which bottomed at 1% in June 2003, gave rise to free flowing mortgage money and the ability to buy and build much larger homes for the same monthly payment of yesterday.
Third, the 78 million-strong baby boomers population, many with overflowing coffers from their big salaries and prior good fortunes in the stock market, traded up to 5,000+ square feet McMansions that would have housed three generations in our grandparents' time - pushing up housing prices across the industry. The last American Housing survey, in 2003, found that nearly 3.2 million homes in the U.S. were 4,000 square feet or more - up 11% since 2001. And fourth, the rush to buy second homes and speculative investment properties and vacation homes for baby boomers created bidding wars in major cities and desirable vacation hot spots alike.
And not only did housing prices go to the moon, so did the stocks of the home builders and related sectors - to the tune of more than 30%, on average. Early investors were indeed very happy!
But beginning in the autumn of 2005, the bloom came off that rose.
The rise in interest rates first caused prospective homeowners to scale down, since larger houses became out of reach. Coupled with the reduced liquidity from the lackluster stock market of the last couple of years and the slower economy, the housing market has been slowly putting on the brakes.
Housing sales started softening, even in the "hot" markets with days on market, a measure of the number of days a house or condo is on the market before being sold, in places like South Florida lengthening from mere days or weeks to 3-4 months, and growing by five times in some markets.
My best friend decided to sell her Palm Beach County, Florida home last November; unfortunately at just the wrong time. As soon as she listed, eight other homes in her neighborhood went up for sale. Then, prices began to fall, a theme that is being played out in most of the regions across the country that saw the highest appreciation.
In the first four months of this year, according to the National Association of Home Builders and the National Association of Realtors, the volume of newly built homes sold fell 11.2%, while sales of existing houses fell 5.7%. The home builders expect housing starts to fall 13% this year, with new home sales forecast to drop about 9%. The result of this lessened demand is a drag on prices and ultimately, lower earnings for the home builders. Already we are seeing companies and analysts reducing earnings forecasts. So it's no surprise that the shares of the home builders have taken a beating lately.
But all is not lost.
While the age of the McMansions may be faltering, there is light at the end of the tunnel for more reasonably-sized and -priced homes.
After all, people still need a place to live.
Mid-market housing is continuing to thrive.
Many baby boomers have decided that taking care of a palace is not that much fun - or cheap! A large contingent is setting its eyes on retirement, and spending their golden years married to an oversized home is just not on these folks' agendas.
Not to mention the double-headed negatives of rising energy (12% boosts in electricity and 43% in natural gas heating costs, in the last 3 years) as well as increasing mortgage costs.
The change is upon us.
The inventory for $1 million-plus homes is averaging 13 months in several regions, more than twice the overall days on market. In Dallas, Texas, sales of 4+ bedrooms homes in the first quarter of this year fell by 31%,
yet sales of smaller houses rose 23%, a positive barometer for future gains in this market.
After all, the next generation coming up after the boomers is just about the same size, and they will all need a place to live, albeit a more modest one than their parents'.
Perhaps that is why the big funds, the insiders and the short sellers are not bailing out of this segment.
In fact, several privately-held home builders have recently been acquired, and at premium valuations. And as you can see from the table below, the change in insider and institutional holdings at the largest of the publicly-traded companies is fairly negligible, and in some cases has actually increased.
Likewise, the shorts have not been betting against the industry to any large extent.
But the result of the media slams and adverse Wall Street reports, which caused the retail investors to jump out, is perhaps, a good contra-indicator for savvy investors.
Just look at the price-earnings ratios of the builders below. When was the last time you saw P/E's in the 4-5 range?
We are rapidly concluding that many of these builders have been or are close to being oversold, and several even look attractive at these valuations.
Industry Toll Bros. (TOL) Centex
(CTX) Beazer
(BZH) DR Horton
(DHI) Pulte
(PHM) Hovnanian
(HOV) Lennar
(LEN) KB Homes
P/E 14.3 5.3 5.4 4.7 4.9 5.0 4.1 5.2 4.3
P/E Hi 5 yrs. 22.7 17.5 n/a 22.8 11.8 n/a
13.7 11.7 12.2
P/E Lo 5 yrs. 7.2 5.6 n/a 4.9 5.3 n/a 4.5 5.6 5.1
LTD/E .87 .72 1.21 .87 .82 .55 1.18 .56 0.0
Chg. In insider holdings 6 mos. n/a (.3%) (16.7%) (17.5%) 0.0% 0.0% (.9%) (1.1%) (1.9%)
Chg. In institutional holdings 6 mos. n/a 2.4% (2.0%) (9.8%) .5% 4.5% 11.2% (4.4%) .6%
Chg. In short interest 3 mos. n/a (7.3%) (10.5%) (14.3%) (2.2%) 36.9% 10.1% (.24%) 5.6%
While we are not yet recommending any of the builders, we will be watching them in the coming weeks and month, especially those with growing institutional interest. We are not expecting a return to the tremendous run-ups their shares saw in the last couple of years, but we also think there may be room to bottom-feed very soon, picking up some shares at very attractive prices. Stay tuned for more.
