Monday, January 31, 2005

Is there a housing bubble?

Alan Abelson: Barrons Online
"IS THERE A HOUSING BUBBLE? If nothing else, that this should even be in question is testimony to the sagacity of that venerable maxim that none is so blind as those who won't see. House prices have wafted inexorably heavenward, climbing something like 8%-10% these past 12 months alone. Sales of existing homes set an all-time high in 2004. And the boom in starts continues apace. Even Wall Street, skittish about the industry's history of wide swings, appears to have come around to the notion that happy days lie ahead for homebuilders as far as the analytical eye can see.

In truth, about the only ones insisting that there is no housing bubble are the people who build houses and folks who are drooling over the prospect of selling theirs for some obscene multiple of what they paid for it. The real question is not whether there's a bubble in housing but when it's going to burst. And that's far from crystal-clear, although we'd hazard that for investors, it's better to be early than sorry. But then we've an unreasonable aversion to bubbles that dates back to when we were a little shaver and couldn't quite get the hang of blowing the darn things.

The chart on this page, the handiwork of Ed Hyman's admirable ISI Group, provides graphic demonstration of just how steamy the housing market is. That line snaking its way up toward the ceiling is Ed's clever version of the affordability index: it divides existing home prices by median family income. What it shows is that the home-price-to-income ratio at 3.35 is a record high and firmly in what Ed labels as bubble territory.

Noting that the housing boom is even more heated in Canada, Great Britain and Japan, he suspects that the U.S. version has a ways to go. Frankly, much as we respect Ed's savvy about markets, we don't find varying degrees of mania the most persuasive investment argument."
"Particularly in light of the latest University of Michigan survey of consumer sentiment. Which shows, reports David Rosenberg of Merrill Lynch in his latest commentary, that the share of households convinced this is the time to take the plunge and buy a house either because real estate is a good investment or to get a piece of the action, jumped to 22% in January, double the percentage a scant 15 months ago.

Still another ominous sighting of possible bubble trouble ahead is by Bank of America's crack market strategist, Joseph Quinlan. Joe cites a story in the Christian Science Monitor that real estate is "one of the hottest curriculums on college campuses" these days.

Over 60 colleges offer degrees in real estate, more than double the number a decade ago. A full 5,000 young scholars now attend New York University's Real Estate Institute (we shame-facedly admit we weren't even aware that NYU had a Real Estate Institute; tells you what we know).

Joe reminds that in the late 1990s, as the stock market bubble was getting ready to pop, enrollment in financial-services courses ballooned all over this fair land.

Our final exhibit in our case for a housing bubble all ready to burst comes from a sharp-eyed reader who also can evidently turn a pretty phrase as well. It concerns Lennar, a leading homebuilder, based in Florida, but with stakes in Texas, California, Nevada and elsewhere. The company has done spectacularly well, racking up sharply rising revenues and earnings, and shareholders have done spectacularly well, too: From around 20 a few years ago, the stock set a recent new high a couple of points below 60.

Our reader, a Miami resident, sent along a piece in a local business paper, the Daily Business Review, laying out in neat detail that, as he put it, the chief operating officer "talks like a bull but walks like a bear." Although said officer and his executive cohorts were brimming over with optimism in a conference call with analysts in mid-December, that didn't prevent him from selling 98,156 shares of Lennar common less than a month later. At $54-$55 a share, he pocketed more than $5 million. (He still owns 60,000 restricted shares and another nearly 71,000 through trusts.)

Insiders may have all kinds of good reasons for selling. But, as we've said before, anticipation that the stock will go up is not one of them."


At 12:43 PM, Anonymous Anonymous said...

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