Macro Wrap – What to Make of U.S. Housing

by Enis January 14, 2013 7:23 am • Commentary

The housing comeback story is old news by now.  Forget the housing comeback, the new debate seems to be centered on the extent of the new housing boom.  Goldman Sachs Research wrote the following in a report on Friday:

The driving forces for our positive view on the sector and these stocks are as follows:

  • Policy:  Fiscal cliff deal was a positive for housing and the Qualified Mortgages (QM) definition eliminated an overhang for the mortgage industry.

  • Prices:  Prices rose 4% in 2012 and we see another year of 3% increase in 2013 driven by momentum and falling inventories.

  • Employment:  Construction is likely to add about 720k jobs over the next 2-3 years, which could further fuel housing growth.


It all sounds pretty rosy.  But we’ve stayed away from housing stocks for one major reason – they’re very expensive.  At the end of the day, what matters most is the price you pay for your asset.  Sure, good news abound in the housing sector recently.  It’s more than reflected in the stocks however.

For example, LEN reports earnings tomorrow morning.  Consensus estimates for 0.45 in earnings per share, which would be the best single quarterly earnings result since 2006.  Well that’s a pretty darn good turnaround, isn’t it?

Here’s the rub.  LEN is expected to earn around $1.55 in 2013 and $2.30 in 2014 based on consensus estimates.  In 2002, at the tail end of a recession, and prior to the housing boom, LEN earned $3.58, and the stock closed the year at $23.47.  That would be cheap (7x), and the stock went on to triple over the next 3 years.  Currently, it’s trading at 27x 2013 estimates, and 18x 2014 estimates.  Seems like a risky stock purchase here, even if the company consistently beats analyst estimates.

Similarly rich valuations exist for the other main homebuilders, like TOL, DHI, or PHM.  I understand the improving macro story, but I don’t understand the infatuation with these stocks.

Markets overnight:

  • Asian markets were very strong, led by the Shanghai index up 3%, continuing Friday’s optimism from the strong Chinese export data. In Japan, the Nikkei closed near 2 year highs, up 1.4%.
  • European price action has been more subdued, with the EuroStoxx up 0.25% right now.  European industrial production declined 0.3% m/m in November, vs +0.1% expectations.
  • SPX futures are flat, though Nasdaq futures are down 0.5% on AAPL testing the $500 level pre-market this morning.  Report from Nikkei that AAPL has scaled back production plans for the iPhone 5.
  • The dollar is lower and commodities are generally higher, with Treasuries close to flat.
  • No major U.S. economic data releases today.