There is no housing bubble. That is a stupid term promoted by journalists and analysts fighting the last war like an old general. The stock market "bubble" burst sending the NASDAQ plummeting from 5000 to 1200. Anybody foresee housing for sale at an 80% discount let me know and I might be able to help you with that problem. It's not going to happen!
If and when certain markets collapse 20% to 30%, it should not be deemed a bubble. It will happen in some markets and has happened in over-built condo markets. But these units will be absorbed in the next few years. The greatest pain will be felt by the biggest speculators and the most overzealous people participating in unorthodox loan programs.
How many stocks move up and down that much in a year? Plenty! Think Google, or Merck, or Black and Decker. Even I, who have been trying to add some sanity to GOOG's valuation through numerous posts, never said GOOG was a bubble stock.
There is a need for more housing, period! As a current investor in four different housing projects -- three in Southern California and one in Phoenix --I can testify that all will sell at considerable profits. We have seen no let-up in demand. Each one is different: One is an infill project of 150 single family homes. Another is a new development of 200 homes in a growing community, a third is a mixed use project of 60 condominiums over retail stores and the fourth is a unique town home project surrounding a parking structure that is commercial adjacent.
The only problem we see is getting entitlements and building permits. This process has become excruciatingly painful in many parts of the country and just about everywhere in California. My home town of Santa Monica being one of the worst offenders, used to be referred to as "The People's Republic of Santa Monica." That was too long a nickname so some just started calling it "Soviet Monica." I love this community but there are times I think we are all over-indulgent meddlers.
If I had a magic wand and created 1,000 unit condominium or apartment projects in Santa Monica or anywhere nearby, all the units could be sold in one week, even in this "bubble market." I have read and heard from numerous sources that our region of the country is going to see an increase in the population of five million people in the next 20 years, not counting any immigration or migration. Heck if I know where they are going to live.
There is no housing bubble in the Gulf States either and no one expects them to come close to cleaning up the devastating results of last years hurricane season any time soon. KB Homes was early to examine opportunities and have already started projects in the region. While there is a massive need in this area of the country other pockets of opportunity exist as well. We are in a retrenchment period as we sell off the speculative markets, adjust to higher but NOT HIGH interest rates and deal with higher commodity prices.
Yes there have been areas that over built based on speculation and greed with people biting off more than they can chew. Eighteen months ago I advised a friend wanting to get in on the Las Vegas boom that he should forget about it. He was interested in a housing tract where a third friend claimed he was making big money. Well, that guy got out just in time to break even. Friend No. 1 would have lost his savings.
While Las Vegas and Florida have seen a market pullback, the only thing I have seen is that homes are taking longer to sell. This is due in part to sellers latent realization that the market has shifted and they need to adjust their expectations. This will happen over the next year or two. Some people with edgy loans will also become victims of their risky propositions and that shake-out will take a little longer based on particular loan terms.
Andrew Barry's story in Barron's and our story by Tom Taulli, Barron's: Time to buy real estate stocks?, both discuss many factors related to whether there might be an investing opportunity in the downturn for housing stocks. I do not know the real estate market everywhere, but I know enough to know there is opportunity. I think the home builders with a national footprint and strong balance sheet have reached a point where the risk is limited. I have also observed that some housing companies like Lennar (LEN) and KB Homes (KBH) have diversified into other areas like urban infill and mixed use projects.
Is there some risk? Yes. There is always some risk. But the risk now has been greatly reduced. For example, buying a company like DR Horton (DHI), with a P/E of 5.8, selling at book value, while they are paying a 2.8% yield does not seem to be sticking your neck out too far by my standards.
Disclosure: I own Merck and have no other position long or short in any other company mentioned in this article.
Sheldon Liber is the CEO of a small private investment company and the vice president for Design and Research of an Architecture & Planning firm.