For those of you who claim to be students of market history or are less than 43.5 years old, let me remind you of how housing stocks used to trade.
Way back when, before this new century, housing stocks seldom traded at more than six times earnings. It didn’t matter who they were or where they were located. The deep cyclically of a normal housing market kept the lid on the housing sector for decades.
But in the year 2000, interest rates were taken sharply lower. Then after 9/11 they were taken to 1% and mortgage securitization ramped up to an unheard of level. Housing became the investment of the century and housing stocks took off. They experienced a rare “multiple expansion”. Investors were willing to pay 20-30-40x earnings for housing stocks and the group took off. Just look at the long-term chart of Toll Brothers (TOL) to see what I’m talking about.
When the housing market crashed, most of these stocks traded back to where they began. And now, with some sectors of the housing market coming out of life support, many of these stocks are market leaders, trading at 70x earning and more.
I know you just want to ride a winner, but thinking past the degenerate gambler in you, should housing stocks be worthy of trading at a roughly equivalent valuation as the fastest growing sectors of technology or biotech? Should an industry that is on life support deserve to trade at double the P/E valuation of Lululemon?
TOL has been positive 10 months in a row and is up 130% in that time. Interest rates can still go lower but not much. Does this seem like a smart bet to you? Or is it a great short? Sounds like a great short to me.
3 Responses to Historic Housing Stock Valuations
hey i remember ,lol. i also remember housing to be a safe but slow and sound investment.seems when the government decided that eveyone should own a house things got out of hand.the crooks and bankers did there worst and as always the tax payer gets the bill.
I suppose it depends on the strategies at play Scott, but I defer to your judgment on this.
I hadn’t previously given much weight to p/e’s, I wonder if this is based on a particular ETF or a particular average of the industry leaders?
Thanks, also, if you get around to a reply.
Enjoy your column…Your
P/E analysis fits perfectly with the fib retrace on the monthlies using 2005 as the high and 2011 as the low. It is poised to decline from here.