Are Housing Stocks Priced To Perfection?

Includes: DHI, KBH, LEN, PHM, TOL
by: George Kesarios

Setting aside high unemployment, subdued economic growth, global growth issues and the approaching fiscal cliff (both in the U.S. and Europe), housing stocks have really taken off as of lately.

Without looking at individual company balance sheets and observing housing data and charts, one has to wonder about the resent rise in many housing stocks. And the question is, are these stock priced correctly or are market participants way ahead of themselves?

Granted housing has bottomed. I will agree with that statement and I will also agree that's it's all uphill from here, however, one has to ask just what exactly is the market trying to discount?

Lets look at some data that are positive for housing:

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Well it seems that housing is more affordable than ever. So that is a sign that many people can afford to buy the. That's a bullish sign for housing stocks.

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If the figures from the Fed are correct, houses are not that affordable in nominal terms. I am assuming that the affordability factor has to do with the low financing terms than anything else. Cheap financing is ok, but buying a house near record highs has a negative psychological factor if you ask me. In any case, the Feds magic of propping up asset prices seems to be working.

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More good news, household debt service levels as a percentage of disposable income are back to normal levels. Yes this is positive for housing, although I doubt that we will see many people treating their house like a credit card, the way they did several years ago. Anyway in any case, the above chart is positive for housing.

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The above chart is also positive for housing. Again assuming the data is correct, it seems like inventories are again at average historical levels, which is probably the most bullish sign for homebuilders.

However ...

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The above chart shows housing starts and building permits. As you can see, they are nowhere near the levels they were several years ago. And if you ask me, they wont get there for many years to come.

And for homebuilders, nothing else matters. In order for home builders to make money, they have to make houses and sell them. Yes affordability helps and so do low mortgage rates, but at the end of they day, that should translate into sales.

Granted I also think that starts will rise, however they will under no circumstances (at least for many years) approach the highs of the previous economic circle.

Please remember that about 20-30% of the houses bought in the bubble years were speculative in nature. I don't think we will see much speculation in housing for a long time.

Also, gone are all the speculative funds who thought they could play the carry trade game with no risk. European investors have lost so much money in assorted exotic U.S. housing securities, that I don't think they will set foot on U.S. soil again for a while.

Also, banks do not give money for free anymore. You actually need to have a real job, a down payment and have a relevant credit score to get a mortgage this time around.

Now lets look at some relevant data of some companies in the space:

Toll Brothers (NYSE:TOL)

TOL Market Cap Chart
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TOL Market Cap data by YCharts

Lennar Corp. (NYSE:LEN)

LEN Revenue Quarterly Chart
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LEN Revenue Quarterly data by YCharts

PulteGroup, Inc. (NYSE:PHM)

PHM Revenue Quarterly Chart
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PHM Revenue Quarterly data by YCharts


KBH Revenue Quarterly Chart
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KBH Revenue Quarterly data by YCharts

DR Horton Inc. (NYSE:DHI)

DHI Revenue Quarterly Chart
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DHI Revenue Quarterly data by YCharts

Am I the only one who sees a disconnect between earnings, revenue and market cap? Is there any reason why these stocks should have a market cap very close to what they had during their highs in the bubble years?

I mean, is there any reason why Toll Brothers should have a forward PE of 32, P/S of 3.5 and P/B of 2.12?

And if these stocks are indeed priced to perfection, that means a lot can go wrong, which also means, they will be prime short candidates, when the conditions will arise.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.