The Globe & Mail published an article over the weekend highlighting Ford shares as a way to play the housing recovery. The article noted that the auto maker has ties to the housing market due to its heavy reliance on pick ups, and that a recovery in the U.S. be driving demand for trucks higher.
Truck sales increased to 645,300 in 2012, the third consecutive year of gains. Even with the steady gains, sales of pickup trucks still sit at 1994 levels and are well below levels seen during the U.S. housing boom, which could leave the door open for further growth. The Globe noted that while homebuilders still have a long way to go before hitting 2005 highs, Ford ay be able to have a stronger run for the following reasons:
1) Ford doesn’t have its history tainted by a bubble;
2) Ford’s P/E ratio is less than 11 versus an average of 36 for homebuilders; and
3) Ford recently doubled its dividend while homebuilders typically distribute little to nothing.
Homebuilders and other housing industry stocks have been strong performers in 2012 as low interest rates offset higher underwriting standards for home loans. The SPDR S&P Homebuilders ETF (XHB) rose more than 54% since the beginning of this year, while the iShares Dow Jones U.S. Home Construction ETF (ITB) is up more than 74% over the same period
While equities may offer exposure to homebuilding companies, commodities represent another great way to play the boom in the homebuilding industry. Timber,copper, cement and other commodities are widely used in the construction and therefore could benefit from the higher demand due to new home construction in the United States.
Timber: Money Does Grow on Trees
A typical 2,400 square foot, single-family home requires approximately 16,000 board feet of framing lumber and over 14,000 square feet of other wood products including plywood, particleboard and fiberboard, according to the Idaho Forest Products Commission. As a result, timber is one of the most essential commodities used in the homebuilding industry.Here are some ways for investors to build exposure:
iShares S&P Global Timber & Forestry Index Fund (WOOD): With a net asset value of $196 million and a 0.48% expense ratio, this ETF is one of the most popular options for investors looking for exposure to timber. The index’s 27 holdings consist of 53% paper and forestry companies and 28% real estate companies.
Claymore Beacon Global Timber Index ETF (CUT): With a net asset value of $170 million and a 0.65% ER, this ETF is another popular option for timber investors. The index holds 28 different companies that are 37.5% weighted in the United States and 72.6% weighted in materials [see also Timber Set to Soar Says Jeremy Grantham].
Plum Creek Timber Co. Inc. (PCL): With a market capitalization of $6.8 billion, PCL is the largest publicly traded timber company in the U.S., holding approximately 6.6 million acres of timberlands across 19 different states. In 2011, the company generated revenues of approximately $1.167 billion.
Copper: Electrifying the Housing Market
The average single-family home uses an average of 439 pounds of copper, including 295 pounds of building wire and 151 pounds of plumbing tube, fittings and valves, according to the Copper Development Association. While the copper industry extends well beyond residential homes, the commodity could still see significant upside from a boom in homebuilding. Here are some ways for investors to build exposure:
iPath Dow Jones AIG Copper Total Return ETF (JJC): With a market capitalization of $115 million and a 0.75% yearly fee, this ETN is the most popular way to play the copper market. The index consists of one futures contract on copper – the Copper High Grade futures contract traded on the COMEX.
iPath Pure Beta Copper ETN (CUPM): With a market capitalization of $2.7 million and a 0.75% yearly fee, this ETN is a distant second to JJC in popularity, but uses a number of different expiration dates instead of a single futures contract with a single expiration date, like many commodity ETFs [see also Physical Copper ETFs? Not So Fast].
Freeport McMoRan Copper & Gold Inc. (FCX): With a market capitalization of $37 billion, FCX is one of the largest publicly traded copper miners in the world, offering significant exposure to the commodity. As of 2011, the company had proven and probable reserves totaling about 119.7 billion pounds of copper.
Notably, J.P. Morgan has been attempting to launch the first physically backed copper ETF, but it is facing opposition from regulators concerned about the impact on the physical markets.
Concrete: The Unconventional Commodity
Concrete may not be a traded commodity on its own yet, but investors can build exposure to the universal building material in many ways. According to the National Association of Homebuilders, the average house built in 1998 used some 14 tons of concrete, or approximately 7.5 yards, to create foundations and slab floors for basements. Here are some ways for investors to build exposure:
Cemex SAB de CV (CX): With a $10 billion market capitalization, CX is the largest cement producer in the world, selling products into more than 50 countries. The company only realized about 17% of its revenues from the U.S., but remains one of the largest suppliers to the market given its $15.14 billion in annual sales.
US Concrete Inc. (USCR): With a $108 million market capitalization, USCR provides ready-mixed concrete, precast concrete products and concrete-related products in select U.S.-only markets. As of March 2012, the firm had the capacity to produce 4 million cubic yards of ready-mix concrete and 3 million tons of aggregates [see also How To Lose Money Investing In Commodities].
Eagle Materials Inc. (EXP): With a market capitalization of $2.5 billion, EXP is another U.S. provider of cement, concrete and aggregates. The company also manufactures and distributes gypsum wallboard which is used in construction, providing added exposure to the homebuilding industry.
Building Commodities into Your Portfolio
The homebuilding industry may have seen a sharp increase over the past year, but many analysts believe that there could be significantly more upside potential. Investors should keep an eye on leading indicators for the industry, like railcar volumes and new building permits, to determine whether or not these trends will continue through next year.
Many of the commodities mentioned in this article have also seen significant appreciation alongside the boom in U.S. housing. Investors may also want to consider the fact that some commodities, like timber, have seen some of the most consistent long-term returns when compared to anything from the S&P 500 to T-Bills to the Consumer Price Index.
Finally, investors should consider several factors when building these commodities into any diversified portfolio. For instance, commodity exposure should be balanced with other asset classes to diversify risk, while the beta co-efficient and risks associated with each of the commodities should also be considered relative to the overall portfolio’s acceptable level of risk.
(TOL : NYSE : US$31.86)
Selling homes on the road to recovery?
Toll Brothers, America’s largest luxury homebuilder, reported a higher quarterly profit and said new orders rose sharply, indicating that the U.S. housing market is well on its way to recovery.
Net income rose to $411.4 million, or $2.35 per share, in the fourth quarter from $15.0 million, or $0.09 per share, a year earlier. The fourth-quarter profit included a net tax benefit of $350.7 million while revenue rose 48% to $632.8 million.
Toll’s net signed contracts jumped 70% to 1,098 units in the fourth quarter ended October and the company’s backlog climbed 54%. The company’s cancellation
rate – the number of cancellations divided by the number of signed contracts – fell to 4.6% in the August-October quarter from 7.9% a year earlier. “With this backlog, and the lowest cancellation rate in our industry, we believe we will deliver between 3,600 and 4,400 homes in 2013 at an average price between $595,000 and $630,000 per home,” Chief Financial Officer Martin Connor said in a statement, implying a 34% increase in deliveries.
The gains so far have been startling.PulteGroup Inc., PHM +1.59% the largest U.S. home builder by revenue, is up 214% in the past 12 months, when new-home sales began rising consistently. It also is the best performer in the Standard & Poor’s 500-stock index over the past year. Lennar Corp.,LEN -1.31% the third-largest U.S. home builder by revenue, is up 117% in 12 months. In the same period, the S&P 500 is up 10%.
“Home sales tend to move higher over a five-year cycle, and this is year one,” says
Kirk Mentzer, director of investment research with Huntington Asset Advisors, a $14 billion fund in Columbus, Ohio. “There’s still a ways to go, even if the rise from here is just half of the current rally.” The firm bought D.R. Horton Inc., DHI -1.66% a home builder in Fort Worth, Texas, at the end of 2011, and is hanging on even after a 71% run-up this year.
Data in recent months have indicated the pace of recovery has accelerated. New-home sales jumped 5.7% in September to their highest level in over two years. The Commerce Department said recently that housing starts had risen to 872,000, the highest seasonally adjusted annual rate in four years.
Investors are more optimistic about the housing sector than they are about the broader economy, in part because of the recent action by the Federal Reserve to further bolster the market by purchasing mortgage-backed securities. Both analysts and investors expect the housing market to continue to improve, though they note that if the recovery comes to a halt, shares of companies sensitive to the housing market—including those of builders—are likely to sell off.
Investors have poured $653.7 million into the iShares Dow Jones U.S. Home Construction Index Fund so far in 2012, putting it in the top 5% of exchange-traded funds in terms of inflows, according to Morningstar.
And home builders have shown resilience during the recent swoon in the broader market. The Dow Jones U.S. Home Construction Index has lost 0.5% over the past two weeks, compared with a 3.3% drop for the S&P 500.
Mr. Mentzer and other bullish investors point to history to bolster their position. During the housing upturn from 2001 through the end of 2005, shares of custom builder KB HomeKBH -2.12% surged 357%. Since September 2011, they are up a relatively modest 145%. And because the housing-market slump of recent years was the most severe on record, there is more room for home-builder shares to rise this time around, investors say.
Sorin Roibu, a housing analyst for money manager Turner Investment Partners, which oversees nearly $12 billion, believes with the labor market in the U.S. still slack, home builders will have an easier time managing costs in the current upswing. He expects bigger margins as a result.
He also says investors shouldn’t underestimate the power of market sentiment, especially at a time when technology and other sectors are facing headwinds. “If you look at home-building stocks, they’re the best direct play on the U.S. housing recovery, and everybody wants to play it,” Mr. Roibu says.
The magnitude of the stock gains has elicited heavy skepticism on Wall Street, where analysts typically are seen as cheerleaders for stocks.
Megan McGrath, executive director and home-building analyst at brokerage MKM Partners, this month downgraded Ryland Group, RYL -0.88% a major builder on the West Coast, to sell, and cut her ratings on D.R. Horton and Lennar to neutral.
“You can still be bullish on housing but not necessarily the home-builder stocks,” Ms. McGrath says. “We’re still in the early stages of recovery, but these stocks are up around 150% in a year, so we thought, look, if you’ve made the trade and you’ve made some money, maybe it’s time to take some profits.”
Susquehanna Financial Group analyst Jack Micenko believes shares have become too expensive. Mr. Micenko says that for shares to warrant their current valuations, the U.S. will need to build an average of 2.6 million new single-family homes a year from 2013 through 2016. During the peak of new-home construction in 2006, the U.S. built 1.6 million new single-family homes. He has a negative outlook on the group.
But today’s annual rate of 872,000 homes is still well short of the norm over the past half century. On average, builders have started construction on about 1.5 million new homes a year since 1959.
Mark Luschini, chief investment strategist with Janney Montgomery Scott LLC, argues that the current level of new-home sales is so low that there still is nowhere for home builders to go but up. “At the end of the day, homes are being sold at an appallingly low rate.…That still bodes well for home builders,” he said. The firm, which oversees $55 billion in its Parker/Hunter Asset Management arm, is keeping its position in the Dow Jones U.S. Home Construction Index steady.
Instead of actual responsible behavior of paying down debt, the primary if not only reason there has been any “deleveraging” at all at the US household level, is because of excess debt which became insurmountable, not because it was being paid down, the result of which is that more and more Americans are simply handing their keys in to the bank and walking away, and also explains why the US banking system is now practicing Foreclosure Stuffing, as defined first here, as the banks know too well, if all the housing inventory which is currently in the default pipeline were unleashed, it would rip off any floor below the US housing “recovery” which is not a recovery at all, but merely a subsidized bounce, as millions of units are held on the banks’ books in hopes that what limited inventory there is gets bid up so high the second housing bubble can be inflated before the first one has even fully burst.
Naturally, two concurrent housing bubbles can not happen, Bernanke‘s fondest wishes to the contrary notwithstanding, especially since as shown above, US households do not delever unless they actually file for bankruptcy, and in the process destroy their credit rating for years, making them ineligible for future debt for at least five years.
It is thus safe to say that all the other increasingly poorer US households [..] are merely adding on more and more debt in hopes of going out in a bankrupt blaze of glory just like everyone else: from their neighbors, to all “developed world” governments. And why not: after all this behavior is being endorsed by the Fed with both hands and feet.
The following graph from TD Securities ( through Sam Ro at BI ) makes a good case for the “subsidized bounce” definition Durden applies to the present US housing market. It’s no secret there’s a huge shadow inventory overhanging US housing, and now it comes out that those great new home numbers are not what everybody would like to think they are.
Many more houses are built than sold. And get shoved on top of the pile that’s already there, both the shadow inventory and the out of the closet one. Which begs the question: how long does a home stay in the “new” category? Does it take 1 year of staying empty for it to move to “existing”? 2 years, 3 years? 5? For one thing, builders and developers certainly have a huge incentive to continue to advertise it as new.
How this constitutes a recovery I just can’t fathom. I think that is just something people would like so much to see that they actually see it. Moreover, there remains the issue that it’s very hard for most to comprehend what debt deflation is, what its dynamics are, and what consequences it has.
Shares of KB Home got a lift after the homebuilder posted a surprise Q3 profit and said that its backlog rose to a four-year high on the back of better pricing and demand in the housing market.
Earnings came in at $0.04 per share on revenue of $424.5 million while analysts were expecting a loss of $0.16 on revenue of $430.0 million. In addition to the positive earnings, the company said its revenue backlog as of August 31 had increased 33% year-over-year to $744.7 million.
CEO Jeffrey Mezger commented, “It is clear that the recovery in housing is gaining momentum across the country as inventory levels are declining and home prices are on the rise.” He went on to say that KB is seeing “dramatic improvement” in California, its largest market, where foreclosures had acted as a headwind in recent quarters. Net orders rose 3% to 1,900 homes while average selling prices increased 8% to $245,100, marking the ninth consecutive quarter of year-over-year price increases.
Prior to the release of the results, KB had the fourth-largest short position of S&P 1500 stocks with 44.41% of its float shorted as of August 31.
The Barron’s cover story this week is about how Home prices are heading higher. It is their third Housing Bottom story since 2008.
We’ve covered each of these in great detail over the years, but what the hell, once more won’t hurt:
• The explosion in home construction this cycle has totally and utterly exceeded all previous home construction booms. Its so much larger than any expansion over the past 40 years as to make the prior 1M drop meaningless (see chart at top);
• Housing completions passed the minus 1MM figure a year ago — you could have called a housing bottom in August 2007 by the same logic . . .
• An unprecedented 10% of homes built after 2000 stand vacant, according to Stansberry & Asssociates Investment Research;
• In just about every area of the country, the ratio of sale prices to per-capita income remains significantly elevated over its historical averages. And, that assumes there won’t be a significant economic downturn. As of July 12 2008, a significant recession is looking increasingly likely;
• Sales have ticked up several times, only to be revised lower in subsequent months. And, the selling season improves each month, from January (the slowest month) to August. Seasonal adjustments sometimes seem to not fully reflect this.
• Median Sale Prices are rising not because home prices are going up, but because less of the inexpensive homes are selling (i.e., smaller starter houses) . The mix of homes — not price increases — are skewing the numbers;
• By nearly every traditional metrics, Home prices remain extremely elevated; Median Price to Median Income or Homes vs. Rentals. All of these imply further price adjustment towards the historical norms;
Barry Ritholtz repeats – Barron’s Is Wrong ( AGAIN).