Home is where the money is in 2003.
A sustained housing boom has given a dramatic boost to home builders, developers and housing-related companies. Individual investors are warming to the idea of buying the industry’s stocks, rather than putting down payments on actual property.
Due to a spotty economy, rising debt loads and the certainty that interest rates must end their descent at some point, there is increasing talk of a housing bubble that’s ready to burst. In fact, some pundits feel high real estate prices are all that’s keeping this country from a depression.
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While that’s not proof of the existence of a bubble, it serves as warning that investors should examine carefully the housing-related firms they may be considering for their portfolios.
Some investments will fare better than others, whether housing market trends remain vibrant or lose steam. The technology bubble’s survivors and failures are reminders that companies doing similar things should never be considered identical.
“I’m in the camp that doesn’t believe there’s an overall housing bubble, though I do think you’ll find small bubbles in local or regional markets,” said David Weaver, housing analyst with Legg Mason Wood Walker in Baltimore. “Demand does seem to be in excess of supply and the increase in prices corresponds to rising personal income.”
Most housing stocks have more than doubled in price since the beginning of this year, thanks to historically low mortgage rates and an unemployment level that Weaver contends is “not bad compared to prior recessions.”
Twenty percent of home builders are publicly traded, twice the level of a decade ago. Large firms enjoy advantages in buying materials and bidding for land, as well as gaining dominance in individual markets.
Toll Brothers Inc. (TOL), a designer and builder of luxury single-family homes, land developer and owner of golf courses, is a stock highly recommended by Weaver. It operates in 22 states in six regions.
“We look at home builders as the most attractive part of real estate due to consolidation in the industry, and the fact that the home-building market is healthy and likely to remain that way,” said Ken Heebner, portfolio manager for CGM Realty Fund (CGMRX) in Boston.
Three-fourths of Heebner’s portfolio is in home builders. His largest positions are Hovnanian Enterprises Inc. (HOV) and The Ryland Group Inc. (RYL), big-time builders of primarily single-family homes in hundreds of communities.
The top-performing real estate mutual funds this year, according to Morningstar Inc., have been:
– CGM Realty Fund (CGMRX), $481 million in assets; “no load” (no sales charge); $2,500 minimum investment; 800-345-4048; up 47.6 percent.
– Alpine U.S. Real Estate Equity “Y” (EUEYX), $55 million; no load; $1,000 minimum; 888-785-5578; up 44 percent.
While there may be no direct link between home improvements and positive housing trends, a strong market does tend to give fix-ups and remodeling a psychological boost.
“I’m cautiously optimistic about home improvement retailers,” said Aram Rubinson, home improvement industry analyst with Bank of America in New York. “I especially like Home Depot, which has righted its ship after an awful performance last year.”
Home Depot Inc. (HD) has become a better operating company due to improvements in inventory practices and staffing, Rubinson explained.
Meanwhile, real estate investment trusts (REITs), which are companies that own and operate income-producing real estate, have been on a roll, though there’s some concern that they’ve gone too far too fast.
The Morgan Stanley REIT Index is up 18 percent (including dividends and reinvestment of dividends) this year, with the average yield on that index’s individual stocks at 6.3 percent.
“A lot of REITs have reached their peak valuation levels, so there’s not much upside potential at this point,” believes Raymond Mathis, REIT analyst with Standard & Poor’s in New York. “The demand for retailing square footage has been stronger than for office or industrial space.”
REITs, traded as shares on major stock exchanges, are involved in apartments, shopping centers, offices, hotels and warehouses.
Chelsea Property Group Inc. (CPG), a REIT that develops and operates upscale factory outlet shopping centers in the U.S. and Japan, is recommended by Mathis and Barry Vinocur, editor of Realty Stock Review in Ocean, N.J. They both consider it a first-rate operation with consistently superior returns.