"The economic crisis began in the housing sector and will likely end there," says Stephen Leeb. In his top-notch The Complete Investor he takes a contrary look at two homebuilders.
"Though my view may sound contrarian to a fault, a close look at the housing market, especially given recent government actions, suggests a recovery will happen sooner rather than later and be stronger rather than weaker.
"When home prices decline, buyers pull back, afraid of buying too soon. This leads to further declines and further buyer reluctance. No surprise, then, that housing starts have fallen dramatically.
"Meanwhile, consumers, who had been borrowing money based on the value of their homes, found this source of credit drying up, which dealt a further blow to the economy.
"It is a vicious circle indeed. Ultimately, though, it will almost certainly end with more willing lenders and a stronger housing market as the huge amounts of money being flooded into the system start boosting balance sheets of potential lenders.
"Pent-up demand plus population growth will ensure that would-be homeowners will be on hand eager to borrow. In addition, an enormous amount of investment money is on the sidelines waiting to buy real estate.
"The likely catalyst for the turnaround will be a clear sign that housing prices have stopped falling. And that shouldn't be far off. As a result, housing-related stocks could be poised to lead the market.
"In the aftermath of the 1990-91 housing crash, leading homebuilders bottomed several months before housing starts bottomed-and soared about fivefold in 18 months. This time around, with so much sideline money waiting to get into real estate, the comeback could be far stronger.
"NVR (NYSE: NVR) and Toll Brothers (NYSE: TOL) has each emerged from the chaos totally intact, with high free cash flow yields and modest debt-to-equity ratios.
"NVR, the most conservative housing stock around, clearly is the less risky choice if housing continues to slump but offers less upside potential from an upturn than the slightly more leveraged and aggressive Toll.
"Indeed, Toll has been using the downturn as an opportunity to add to its land position. Also the company caters almost exclusively to higher-income buyers, who should be among the first to return to the market.
"The company's potential has attracted the attention of a major Middle Eastern sovereign wealth fund, which reportedly owns nearly 5% of the stock. Over the next 18-24 months the stock could double."
Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.
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Reader Comments (Page 1 of 1)
11-10-2008 @ 4:07PM
BHarrison said...
I'm sorry but this comes across as a lot of optimistic wishful thinking / hogwash to me based on my insider view of the housing market in south Florida. They produced (built) 80,000 condominium units; and approximately 80% of the "contracted buyers" WERE "real estate speculators" . . . We now have a THREE YEAR INVENTORY of condos and houses.
How many "qualified mortgage applicants" are there, or will there be to purchase this over abundance of housing? Even by lowering the prices and the mortgage rates, with the excalating unemployment to date, and the projections for the future (as the economic situation gets worse), where are these "buyers" going to come from? And even more homeowners will wind up in situations with the market value of their homes being less than their mortgage amount . . . right? So, more people will default on their mortgages and the problems will just worsen.
Who is going to qualify, or be willing to buy these condos and home? Unemployed or financially strapped families can't buy these homes. hell, they didn't have "real buyers" during the previous (phony) good economic times. And how many of those who "have money" are going to be willing to invest in real estate that is not likely to appreciate very much over the next decade?
In my opinioon, the aurthor of this article must have been smoking dope to have such an optimistic perspective.
11-10-2008 @ 4:18PM
BHarrison said...
I would also add that even for those who might be willing to invest in real estate for the long term (like ten years), there is a relatively HIGH maintenance expense to maintain the value of "rental properties". And with the projections that real estate may never again experience the astronomical appreciation, as it did in the past decade or two, where is the ROI to stimulate this projected massive investment in real estate; it certainly isn't there for the "average" investor, is it? Unemployed or financially strapped familes cannot afford or qualify for home mortgages . . . where are the buyers going to come from?