bubbles occur when speculative activity is excessive. speculative buyers competing with bonafide users driving up the prices.
people are definitely buying houses simply because prices are going up. That is either momentum investing or the Greater Fool theory, depending on how you want to look at it. Credit has been rediculously easy over the past few years, especially in the starter home market. I personally know a mid-20's couple working at $10/hr jobs and one had a bankruptcy, and they were still able to buy a new starter home.
I really don't understand the bear case for these stocks. If you're talking about getting a point or so off a weak number, ok, no problem, but if you're talking about a substantial price break here I don't agree. Unlike in the past, these are well-run companies. They have consolidated and eliminated most of the pickup truck competitors who tended to overbuild in goo dtimes. These guys are so big they have tremendous leverage with suppliers. They have access to attactive financing. They have land. They are also damn cheap stocks. All the arguments that they break seem to be based on one of three things, ie. housing bubble, massive foreclosures or rates going up. The last two are pretty easy. No one believes rates are going up materially anytime soon. Foreclosures are a product of unemployment. Whatever the number tomorrow shows, unemployment has peaked for this cycle, and at a pretty low level. We are not roaring out of this recession, but GDP is growing pretty strongly and we are sitting on massive monetary stimulus that has ALWAYS produced a recovery. This time could be different, but that's not the smart bet. The so-called housing bubble. A bubble implies an unsustainable and irrational price based on speculative factors more than actual demand for housing to live in. I have seen plenty of these over the years, when real estate agents would buy houses and flip them at the clsoing, when people bought beach condo's because they knew they would go up, when people borrowed the down payments or had disguised second mortgages because you had to get in the market. Sorry, I just don't se any of that now. What I see are strong employment, low rates, steady demand, not much supply and steady to moderate price increases. Not the stuff of bubbles. Housing may slow down, the stocks may sell off, but I just don't see a reasonable case that they implode.
I was at a party on Saturday night and a rather smart person employed by NT gave me the well renting is like throwing your money away. Second time I've heard that in a week. Isn't that the same thing we all heard two years ago about not taking advantage of the company's 401K. People are now seeing houses as a store of value. What happens when the NT person is laid off? What happens when the retired/semi retired person needs to cut expenses or raise cash? Any possibility these people will start selling their houses? EMC didn't crack with the market cause companies will always need storage, fast forward to 02. I would consider more laying on the Real Estate sector, Builders, Suppliers, and REITs as some good short opportunities. But the same rules apply, if you are wrong, get out.
I think you can lose big time if you happen to buy at the wrong time...which would be when everyone is excited about real estate and buying. Go back and look at history. If you were unlucky or dumb enough to buy at previous peaks in real estate prices, it would take you a long time to break even. Like any other major purchase you have to go against the grain and buy when everyone else is selling (and interest rates are high). Otherwise you are risking a lot! The worst that you can do if you don't buy is that your rent remains the same or even falls. But if you have bought a house at the wrong time, the consequences can be disasterous to your financial health.
a home is a home. if it happens to appreciate in value, that's a great thing. there's no value added in flipping houses.
you guys sound like Alan Abelson from 1995 to 2000. yes, eventually he was right but you left a lotta kachingo on the table if you paid attention. Housing will not be on thin ice until we see one of three things--rates going up substantially, unemployment accelerating or overbuilding. There are no data to support any of these now. I don't advocate speculating in houses. The transaction costs are too high. But there is truth to the renting is throwing your money away argument. You put the power of compounding to work for you as well. There is also the problem of being priced out of the market. Doubt it? Talk to someone in southern california who didn't buy 5 years ago and wants in now.
Do a search on google for Stephen Roach of Morgan Stanley. He has been "pounding the table" on a housing price bubble on CNBC, and in the print media, most notably the NY Times Op Ed about a week ago. His argument is that a ton of cash has exited the stock market and entered the real estate market. To bolster his view, he notes that the housing affordability index (disposable income relative to house prices) is stretched to an extreme (sorry I don't have the numbrs off hand) relative to rental prices. There is also a historical relationship between rents and carrying costs of ownership that is now way out of wack. More Anectdotally, my Mom is an appraiser in Las Vagas and she has noticed a tidal wave of "investor buyers" of housing of late. That is, people cashing out of stocks in California, and buying houses to rent in Las Vegas as investments. The trouble is, they are buying them cash flow negative. The rent doesn't cover the carrying cost. So they are betting on price appreciation to cover the total return gap. This seems like a greater fool theory at work if ever I saw one. Finally, it is well publicized that delinquencies and foreclosures have spiked and other "perfect storm" pieces are falling together. While these stocks seem cheap on a P/E multiple basis, they have been that way through the boom times also. P.S. add "len" "kbh" and "ctx" to your list
sorry for the separate post but, I believe the perfect storm scenario for housing will less affect homebuilders than the lenders. Sure, earnings will be negatively affected yada yada but the home lenders are long a lot of crappy loans that are delinquent and will have to be written down. Similarly the sub-prime lenders and consumer finance companies will be negatively affected. The homeowners are also a big portion of their customer base. Think Comerica, Household International, Capital One, and there are many more. The S&L's and regional banks are vulnerable to this. Think cbh, nfb, gpt, and many more. To compound things, we have at best a little more downside action on interest rates short term, with one way to go thereafter. This is very bad for financial institutions in general. Bad real estate loan problems are just biginning to be the topic du jour.