Housing Prices Are Way Up, But Experts Disagree on Why

Photo courtesy of thejewishdenver.com

Photo courtesy of thejewishdenver.com

What is driving the recent rapid rise in housing prices? And is this a sign of a sustained economic recovery? Those were among the questions during a segment covering U.S. housing on CNBC May 28 (http://www.cnbc.com/id/100769361). Home prices during the first quarter of 2013 were up by 10.2 percent nationally, according to the S&P/Case-Shiller Index, the highest since 2007. Phoenix and Las Vegas, two of the regions hit hardest by the recession, were up the most.

Experts point to the very low mortgage rates (held artificially low by the Fed) and the low inventory of houses as among the reasons for the increase. Very few new houses are being built so sales are cutting into the inventory, increasing demand for the few left for sale.

Those who believe the housing market will continue to prosper say population growth will be a driver: One million new households a year are being created. Naysayers, who believe the price increases are not sustainable, say the market is being driven by investors who are buying and renting. They also point to still low construction employment numbers and the fact that college graduates, who should be a major factor in first time homebuyers, are not getting jobs and are shackled with $1 trillion in student loan debt.

While there is little doubt that houses are being appraised at higher prices, the small cap home builders, who had been on a tear since last summer, have seen their valuations flatten out. Here is an update on the home builders we have been following for the past year:

Red Bank, NJ-based Hovnanian Enterprises (NYSE: HOV, http://www.khov.com/) specializes in single-family detached homes, condominiums and town homes and operates in two segments: homebuilding and financial services.  As recently as October 2011 HOV was trading for $0.89. But since March HOV has been hovering around the $6 mark. HOV closed May 28 at $6.15, up 11 cents for the day with a market cap of $856 million. Its 52-week trading range is $1.52-$7.43.

Los Angeles-based KB Home (NYSE: KBH, http://www.kbhome.com/) is a home building and financial services company catering in large part to first time buyers. KB is an old Southern California home builder, founded in 1957 and formerly called Kaufman and Broad. As recently as last Aug. 31 KBH traded for $11.04 with a market cap of $851 million. It closed May 28 at $23.16, up 5 cents for the day with a market cap of $1.9 billion. Its 52-week trading range is $6.46-$25.14.

Columbus, OH-based M/I Homes Inc. (NYSE: MHO, http://www.mihomes.com/) builds single family homes primarily in the Midwest, Mid-Atlantic and southern parts of the U.S. The  company was founded in 1973 and, like most of the other builders, has homebuilding and financial services divisions. It also had a run up into March and closed March 20 at $26.03 with a market cap of $584 million. MHO closed May 28 at $26.47, up 29 cents for the day. Its 52-week trading range is $12.24-$29.07.

Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com/) builds and sells single-family and multiple-family homes in 16 states in the U.S. It also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. Back in mid-September BZH was trading for $3.77. It closed March 20 at $16.86 with a market cap of $410 million. On May 28, BZH closed at $21.79, up 44 cents for the day, with a market cap of $547 million. Its 52-week trading range is $3.46-$23.29.

Irvine, CA-based Standard Pacific (NYSE: SPF, http://www.standardpacifichomes.com/) builds single family and detached homes and targets a wide range of homebuyers. It also provides mortage financing services through its mortage finance subsidiary, Standard Pacific Mortgage. SPF closed March 20 at $9.07 with a market cap of $1.9 billion. It closed May 28 at $9.52 down 16 cents with a market cap of $2.1 billion. Its 52-week range is $4.39-$9.97.

Westlake Village, CA-based The Ryland Group (NYSE: RYL, http://www.ryland.com/) is a homebuilder and mortage finance company. RYL covers many aspects of the home buying process including design, construction, title insurance and escrow. RYL closed March 20 at $42.16 with a market cap of $1.9 billion. It closed May 28 at $47.60, down 86 cents, with a market cap of $2.2 billion. Its 52-week trading range is $19.25-$50.42.

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Turnaround in Housing Market, Low Inventory Causing ‘Bubblelike Price Jumps’

Photo courtesy ownthedollar.com

Photo courtesy ownthedollar.com

Home construction was an important topic this week, with the release of data showing construction on new U.S. homes in February showed “gains for single family residences and apartments as longer-term trends signaled a housing market that continued to strengthen,” according to the Wall Street Jounal’s Market Watch.

In fact, the turnaround in the housing market, after so many months of lagging demand, has caught home builders off guard, according to the New York Times (http://www.nytimes.com/2013/03/21/business/economy/in-us-surprise-housing-demand-catches-industry-off-guard.html?ref=business&_r=0). “After six years of waiting on the sidelines, newly eager home buyers across the country are discovering that there are not enough houses for sale to accommodate the recent flush of demand,” noted the Times report.

That’s leading a rush for the new but still limited inventory and “bubblelike price jumps” in areas that have been hit hard in recent years. Standard & Poor’s Case-Shiller index shows that prices nationwide rose 7.3 percent throughout 2012 but in places like Sacramento, CA and Phoenix, the prices have risen 35 percent and 26 percent, respectively. Part of what’s driving the market is the improved economy, but the low interest rates are also playing an important role, noted experts in the Times story.

Certainly this is great news for investors in small cap housing stocks, who have already enjoyed a great return if they invested last Fall. Their only issue now is whether to sell and take some profits or continue to enjoy the rise.

Here are six small cap home builders we last covered Sept. 14:

Red Bank, NJ-based Hovnanian Enterprises (NYSE: HOV, http://www.khov.com/) specializes in single-family detached homes, condominiums and town homes and operates in two segments: homebuilding and financial services.  In October 2011 HOV was trading for $0.89. By Sept. 14, 2012 it had jumped to $3.89, with a market cap of $515 million. HOV closed March 20 at $6.32, up 13 cents for the day. HOV’s market cap is now $879 million and 52-week trading range is $1.52-$7.43.

Los Angeles-based KB Home (NYSE: KBH, http://www.kbhome.com/) is a home building and financial services company catering in large part to first time buyers. KB is an old Southern California home builder, founded in 1957 and formerly called Kaufman and Broad. Back on Aug. 31 KBH closed at $11.04 with a market cap of $851 million. It closed Sept. 14 at $13.65, pushing its market cap up to $1.05 billion. KBH closed March 20 at $21.57, up 54 cents with a market cap of $1.67 billion. Its 52-week trading range is $6.46-$21.79.

Columbus, OH-based M/I Homes Inc. (NYSE: MHO, http://www.mihomes.com/) builds single family homes primarily in the Midwest, Mid-Atlantic and southern parts of the U.S. The  company was founded in 1973 and, like most of the other builders, has homebuilding and financial services divisions. It closed Sept. 14 at $20.77, with a market cap of $379 million. MHO closed March 20 at $26.03, up 86 cents on the day, and now has a market cap of $584 million. Its 52-week trading range is $11.25-$29.07.

Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com/) builds and sells single-family and multiple-family homes in 16 states in the U.S. It also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. At the close on Sept. 14 BZH was trading for $3.77. It closed March 20 at $16.86, up 19 cents for the day, with a market cap of $410 million. Its 52-week trading range is $10-90-$20.15.

Irvine, CA-based Standard Pacific (NYSE: SPF, http://www.standardpacifichomes.com/) builds single family and detached homes and targets a wide range of homebuyers. It also provides mortage financing services through its mortage finance subsidiary, Standard Pacific Mortgage. SPF closed Sept. 14 at $7.46, up 19 cents for the day and setting a new 52-week high, with a market cap of $1.49 billion. It closed March 20 at $9.07, up 35 cents for the day, with a market cap of $1.9 billion. Its 52-week range is $4.12-$9.18.

Westlake Village, CA-based The Ryland Group (NYSE: RYL, http://www.ryland.com/) is a homebuilder and mortage finance company. RYL covers many aspects of the home buying process including design, construction, title insurance and escrow. It closed Sept. 14 at $31.52, also setting a new 52-week high, with a market cap of $1.41 billion. RYL closed March 20 at $42.16, up $1.61 for the day, with a market cap of $1.9 billion. Its 52-week trading range is $17.18-$43.

Fed, Wall Street Euphoria Mean More Good News for Small Cap Housing Stocks

The euphoria on Wall Street touched off Sept. 13 by the Federal Reserve lifted many stocks in many industries, including the small cap home builder stocks we have been following in recent weeks.  The Fed announced it would buy $40 million of mortgage-based securities a month and renewed its pledge to keep interest rates at their current historic lows until at least the middle of 2015.

The Wall Street Journal quoted Todd Abraham, co-head of government and mortgage bonds at Federated Investors in

Photo courtesy of axiahomeloans.com

Pittsburgh, who called it “‘unprecedented support’ of the mortgage market even if there are doubts as to how much it can affect the housing market.” He noted that the Fed’s move caused mortgage-backed securities to soar to their best day in four years.

The six small cap home builders we last covered Aug. 31 all enjoyed a nice bounce on Sept. 13 and then followed up with more gains Sept. 14. While certainly not a scientific survey or an in-depth analysis, or even any indication these stocks could go up further, but it appears that investors found the Fed’s move, perhaps coupled with the recent uptick in housing, enough reason to buy these small caps, all of which have been beaten down in recent years.

The six stocks include:

Red Bank, NJ-based Hovnanian Enterprises (NYSE: HOV, http://www.khov.com/) specializes in single-family detached homes, condominiums and town homes and operates in two segments: homebuilding and financial services.  The company’s stock was trading for as low as $0.89 last October. It closed Aug. 31 at  $2.92,  increasing its market cap to more than $370 million. At the close of market Sept. 14, HOV was trading for $3.89, causing its market cap to jump to $515 million.

Los Angeles-based KB Home (NYSE: KBH, http://www.kbhome.com/) is a home building and financial services company catering in large part to first time buyers. KB is an old Southern California home builder, founded in 1957 and formerly called Kaufman and Broad. Back in early July it was trading for $9.74. It closed Aug. 31 at $11.04, increasing its market cap to $851 million. It closed Sept. 14 at $13.65, up 74 cents for the day. Its market cap is now $1.05 billion.

Columbus, OH-based M/I Homes Inc. (NYSE: MHO, http://www.mihomes.com/) builds single family homes primarily in the Midwest, Mid-Atlantic and southern parts of the U.S. The  company was founded in 1973 and, like most of the other builders, has homebuilding and financial services divisions. Back in early July it was trading for $17.50. It closed Aug. 31 at $19.30. It closed Sept. 14 at $20.77, bumping its market cap up to $379 million.

Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com/) builds and sells single-family and multiple-family homes in 16 states in the U.S. It also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. Back in early July its market cap was about $283 million and it was trading for $2.86. It closed Aug. 31 at $2.94. By the end of the day Sept. 14 BZH was trading for $3.77, up 26 cents on the day, increasing its market cap to $464 million.

Irvine, CA-based Standard Pacific (NYSE: SPF, http://www.standardpacifichomes.com/) builds single family and detached homes and targets a wide range of homebuyers. It also provides mortage financing services through its mortage finance subsidiary, Standard Pacific Mortgage. It closed Aug. 31 at $6.70 with a market cap of $1.34 billion. SPF closed Sept. 14 at $7.46, up 19 cents for the day and setting a new 52-week high. Its market cap is now $1.49 billion.

Westlake Village, CA-based The Ryland Group (NYSE: RYL, http://www.ryland.com/) is a homebuilder and mortage finance company. RYL covers many aspects of the home buying process including design, construction, title insurance and escrow. It closed Aug. 31 at $26.81 with a market cap of $1.21 billion. RYL closed Sept. 14 at $31.52, also setting a new 52-week high. Its market cap grew to $1.41 billion.

Real Estate Experts Seem to Agree: Home Prices ‘Inching Up’ and Housing Is Back

The housing market is back. That news has been popping up throughout August based in part on the word that storied investor Warren Buffett is “betting big” on housing, according to a Wall Street Journal video featuring housing reporter Joe Light (http://live.wsj.com/video/why-buffett-is-betting-big-on-housing/432BAEE2-88DB-4382-9496-2DA9F86E3047.html?KEYWORDS=joe+light+housing#!432BAEE2-88DB-4382-9496-2DA9F86E3047).

Photo courtesy of 123RF.com

Light brings up some excellent points aimed at the retail investor. They include:

  1. New home inventories are the lowest they have been in almost five decades. As of Aug. 2 there were only 144,000 new homes for sale.
  2. Home prices have started to “inch up,” based on the Case-Shiller Home Price Index and other similar reports.

Light suggests that the most important thing for home prices is momentum, which he says is now in home prices favor. Along with the momentum effect, the other important indicator is price-to-rent ratios, comparing home prices to rents, which are back to the very low level they were at in either 1999 or 2001, depending on what index you are looking at. 

For retail investors, Light says there are two ways to play this improving housing market: either by buying commercial real estate investment trusts which are focused on properties with short leases such as self-storage units where owners can raise the rents quickly as the economy gets better; or by buying home builders. As examples, he listed Lennar and KB Home.

Light’s views on the low supply of newly constructed homes was seconded by J. Allen Smith, chief executive of Prudential Real Estate Investors, owners of about $50 billion in real estate assets. In part of a wide-ranging interview in the Aug. 29 the New York Times, Smith said “new construction starts are so low that even with an anemic economy–one bouncing along at 2 percent growth–the supply-demand fundamentals will continue to improve.” (http://www.nytimes.com/2012/08/29/realestate/commercial/the-30-minute-interview-j-allen-smith.html)

Housing prices, even in the hardest hit areas like Miami, Atlanta and Detroit, seem are “inching up” nationally “for the first time since 2010, when sales were helped by a temporary tax credit for home buyers,” according to another story in the Aug. 29 New York Times (http://www.nytimes.com/2012/08/29/business/economy/home-prices-rise-survey-shows.html).

There are several  small cap home builders to choose from, including four we have covered in the recent past.

Red Bank, NJ-based Hovnanian Enterprises (NYSE: HOV, http://www.khov.com/) specializes in single-family detached homes, condominiums and town homes and operates in two segments: homebuilding and financial services.  The company’s 52-week trading range shows it was trading for as low as $0.89 last October and then went on a tear, going as high as $3.31 in early February. When we last checked on July 11 it was trading for $2.65 and its market cap was about $350 million. It closed Aug. 31 at  $2.92, up 20 cents for the day, increasing its market cap to more than $370 million.

Los Angeles-based KB Home (NYSE: KBH, http://www.kbhome.com/) is also a home building and financial services company catering in large part to first time buyers. KB is an old Southern California home builder, founded in 1957 and formerly called Kaufman and Broad. Back on July 11 its market cap was $754 million and it was trading for $9.74. It closed Aug. 31 at $11.04, up 17 cents for the day, increasing its market cap to $851 million.

Columbus, OH-based M/I Homes Inc. (NYSE: MHO, http://www.mihomes.com/) builds single family homes primarily in the Midwest, Mid-Atlantic and southern parts of the U.S. The  company was founded in 1973 and, like most of the other builders, has homebuilding and financial services divisions. Back on July 11 its market cap was $331 million and it was trading for $17.50. It closed Aug. 31 at $19.30, up 32 cents for the day, increasing its market cap to $352 million.

Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com/) builds and sells single-family and multiple-family homes in 16 states in the U.S. It also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. Back on July 11 its market cap was about $283 million and it was trading for $2.86. It closed Aug. 31 at $2.94, up 6 cents on the day, increasing its market cap to $297 million.

Two home builders we didn’t cover previously, that are both trading near their 52-week highs include:

Irvine, CA-based Standard Pacific (NYSE: SPF, http://www.standardpacifichomes.com/) builds single family and detached homes targeting a range of homebuyers. It also provides mortage financing services through its mortage finance subsidiary, Standard Pacific Mortgage. It’s market cap is currently $1.34 billion and 52-week trading range is $2.17-$6.71. It closed Aug. 31 at $6.70 up 14 cents for the day.

Westlake Village, CA-based The Ryland Group (NYSE: RYL, http://www.ryland.com/) a homebuilder and mortage finance company. RYL covers many aspects of the home buying process including design, construction, title insurance and escrow. Its 52-week range is $9.15-$27.15 and its market cap is $1.21 billion. It closed Aug. 31 at $26.81, up 81 cents for the day.