The Next Housing Bubble?

 | Nov 14, 2012 | 5:00 PM EST
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As I look at all the available housing data and then compare it to the stock performance of companies closely aligned with the sector, all I can think is here we go again. The performance of many stocks in the housing sector this year reminds me more of the 1999 Nasdaq bubble than of the run-up in the value of these stocks during the housing bubble.

Home Depot (HD) is up 85% this year, Lowe's (LOW) is up 28%, Lumber Liquidators (LL) is up 300%. Toll Brothers (TOL) is up 50%, the SPDR S&P Homebuilders (XHB) is also up 50%. I could go on.

At the height of the most recent housing boom at the end of 2006, HD was about $40 per share. It's now 50% above that level. Lumber Liquidators went public at $11 per share on Nov. 9, 2007, hit a low of about $6 a few months later and bounced between $10 and $30 per share until the beginning of this year when it opened at about $18. It's now around $53.

Toll shares are now back almost exactly where they were at the end of 2006, at the peak of the housing boom. Traders and investors alike appear to have decided that not only is this year's housing rebound solid, but that the U.S. is in the early stages of another housing boom. I can't arrive at any other conclusion.

Yet the data from bank call reports continue to indicate that non-performing residential loans continue to be a growing rather than a shrinking problem. At Wells Fargo (WFC) the value of non-performing residential first trust loans has held in the range of 14% of their portfolio for the past eight quarters and is only a few percentage points below the high of about 17% set in the first quarter of 2010. And that's the best performance of all of the money centers.

At Bank of America (BAC), the percentage of non-performing residential loans has steadily increased from a low of around 14% in the fourth quarter of 2009 to its highest level ever at around 21% today.

At JPMorgan Chase (JPM), that percentage is also about 21% and has been for four years. Citigroup's (C) non-performing loans had been decreasing over the past three years until the third quarter of this year when it jumped to about 11% from around 9% in the second quarter. The performance of their stocks has been similar to those in the housing space. BAC is up 80% this year, WFC around 15%, JPM about 20%, and C is up around 35%.

The steadily rising number of non-performing first trust residential mortgages indicate continuing structural problems in the banking sector, mortgage banking, the housing sector, and overall economy. But the stocks of companies in the housing sector and the banks stocks themselves reflect no concern about these issues at all, as far as I can tell.

This dichotomy can't continue perpetually, though. Either the structural problems have to show signs of dissipating imminently or these stocks are grossly overvalued currently.

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