Orleans Homebuilders: Can the Market Predict Land Values?

Includes: OHB, XHB
by: Saj Karsan

Although rarely exactly equal, we've seen how market values tend to track the book values of homebuilders over time (see here and here).

Here's one example of a particularly volatile homebuilder when it comes to its price to book over time. Orleans Homebuilders (OHB) operates in 14 markets across the US:

But what is causing its volatility? Is the market price bouncing around all over the place, or is the book value constantly changing, or some combination thereof?

Here's a look at the price and book values separated out to see how they've moved over the same period:

Clearly, market values are more volatile than book values, suggesting that one can take advantage of the situation by buying when market values are low and selling when they're high.

However, we do see the market having some ability to predict the direction of the book value. In the late 80s, we notice that market values were lower than book values, correctly predicting that book values were about to fall (which it appears they did for this company throughout the late 80s). Again, in the early 2000s, we see that the market correctly predicted that book values were about to shoot up, and soon enough, book values shot up thereafter.

At the same time, despite the market's accuracy in predicting the direction of book values, it overshoots its mark almost every time. Once again, this is clearest in the late 80s, where markets were far below book values ever reach (creating a buying opportunity), and again in the early 2000s, where markets clearly overshot the top.

Most recently, we've correctly seen markets punish homebuilders (with OHB being no exception) in advance of the drop in book values. The question is, at what point will it have overshot its mark?

By having enough of a margin of safety between the market and book value, you can protect your downside.