Value Investors Should Be Looking at Housing Opportunities

It's common to hear that the housing industry is in a depression, and that this type of collapse is unprecedented in American history. When one looks at house prices, which we did here, one can see why. There was a huge run-up in prices, and a huge collapse as a result. Those who bought in at the height of the market are suffering now. But for the housing industry itself, the construction pattern is actually very familiar. Here's a look at U.S. housing completions since 1968 (note that 2009 is an estimate through September):

Click to enlarge:

The boom and bust phenomenon in housing construction is common throughout history! But it just hasn't happened for a while, which may have fooled people into thinking this is not a highly cyclical industry. Notice that for whatever reason (e.g. cheap credit, low supply due to the fact that there was no preceding boom), there was no bust in the last recession in 2002. But current reductions in construction have caused panic levels to soar, allowing investors the option to purchase assets at great discounts.

While the current low levels of construction are taking a big bite out of GDP, this is necessary in order for existing inventories to be absorbed. Once supplies have been sufficiently reduced, this industry will be back. When that is, is anybody's guess. But when the market is fearful, one can find companies in unfavoured industries that trade at discounts to their assets, which is what value investors try to do.

Comments

[prairiedog555:]

I agree, I am old enough to remember California housing in the 90"s when people were upside down in their homes and people walking away from them. Also in Tx and Louisiana in the 90's when oil went to $9 a barrel. Whole neighborhoods of unsold homes. Then bought by speculators for pennies on the dollar.
And in the Carter years when "experts" stated that interest rates would never be below 12%
Beware the experts and remember that all things revert to the mean.

Nov 12 08:18 AM