Monday brought news that the number of existing home sales was nicely up about 5.1% year over year (non-seasonally adjusted) in May and comfortably back in the range that dominated during the late 1990s and early 2000s. Potential sellers will be pleased to learn that median existing home sale prices are now back near the pre-crisis highs, but for those looking to buy, this is not great news given the lack of gains in income levels. In fact, buying a home in many of the millennials' favorite urban areas is out of reach for most, according to a recent Bloomberg study.
Tuesday we learned U.S. home prices rose 0.3% on a seasonally adjusted basis, which was less than the 0.5% economists had predicted for April. The difference is likely due to more sellers putting properties on the market than was expected, with inventory rising to 2.3 million properties last month from 1.9 million at the start of the year. A potential boon of sorts to companies like Realogy Holdings (RLGY) and Re/Max Holdings (RMAX) if first-time buyers continue to enter the market. First-time buyers in May represented 32% of all sales, up from 30% in April and 27% a year ago.
We also learned Tuesday that 546,000 new single-family homes sold in May, up from 534,000 in April and 457,000 in May 2014, rising 19.5% year over year. This was above a Reuters survey of economists who predicted 525,000 units. The median price for an existing home was up 7.9% in May from a year earlier, to $228,700.
If we continue to see home prices rise more than income levels while interest rates either remain stable or possibly increase, this will be good news for those providing residential rentals such as Camden Property Trust (CPT), which is focused on the ownership, development, construction and management of multifamily apartment communities in the South, Midwest, Mid-Atlantic and West, with a total of 181 properties, 13 of which are under construction. Net income has grown from $40.04 million for the quarter ending March 2014 to $115.6 million for March 2015, with EBITDA nearly doubling from $98.94 million to $183.02 million for the same two quarters. The stock's current dividend yield is around 3.5% with a P/FFO (Price to Funds From Operations 2015E) of 17.1 vs. 18.8x median for S&P 500 peers with positive FFO. It recently dropped below its 50- and 200-day moving averages, but has since rebounded upward.
Home Properties (HME) is another REIT with operations in the Northeast, Midwest and Mid-Atlantic focused primarily on apartment communities, with some additional commercial holdings. HME yields just over 4%, trades at around 15.8 P/FFO 2015E and has recently tested its 50-day moving average, rebounding to the upside. The downside, of course, is that the combination of home prices rising faster than income levels will hamper home sales. This is another reason to think Washington should be examining options such as a tax code overhaul, overseas cash repatriation, regulatory reform and the like, which could entice companies to invest back inside the U.S. thus driving higher-quality job growth than what we've seen thus far in this "recovery."
We've also been hearing a lot of talk lately about whether the market is overvalued and how the current run has been going on for an uncomfortably long time. Here's the problem: Even if we could show that the market is highly overvalued today, the expansion of P/E ratios and the upward march of equities could continue for some time. The chart below shows that, at least according to the Shiller S&P 500 cyclically adjusted P/E, we're in the same heady territory as we were just before the last big correction.
If we step even further back, the picture of interest rates and the domestic market equity movements reveal, at least for Hawkins, some rather nail-biting trends.
First, notice the blue line showing the 10-year Treasury rate starting a multidecade rise from 1962 to the brutal peaks of over 12% in the early 1980s, falling fairly consistently since then. If you think about that for a moment, it has some serious ramifications across all aspects of our economy. The country has experienced a continual downward trend in interest rates for over 32 years! That means no one under say, 60, which includes the two of us, really has any idea what it is like to live with stable rates, let alone sustained increase in rates. Yes, we realize we've seen what amounts to spurts of higher rates over the last 30+ years, but as John Murphy would likely point out, the trend has been a down one.
The vast majority of those on Wall Street, behind trading desks, bank loan officers, entrepreneurs, hedge fund managers, even CFOs of Fortune 500 companies, outside of a few older unicorns, have no firsthand experience in a rising rate environment. We're sure that won't cause any problems, though ... gulp! So while these REITs could enjoy further moves to the upside, make sure you have a grasp on how they will be affected by and intended to manage a rising rate environment.
The second thing that you'll notice is the red line with the three rather dramatic upward slopes denoting the movements of the S&P 500. We thought it would be interesting to take a look at just how dramatic those increases were and how long they lasted. The first began (approximately) in December 1994 and ended in March 2000, pushing the S&P up around 240% over about 1,900 calendar days. Then we experienced the dot-com bubble burst and all the fun that entailed. The second climb began around October 2002 and ended in October 2007, with the S&P 500 rising about 100% over around 1,800 days. So this time the increase was a bit less than half, but it occurred over nearly the same number of calendar days.
The current run-up began in March 2009 and today, nearly 2,270 calendar days later, the market is up over 210% and still climbing. More food for thought as we've been on a heck of a long run this time and most investors are aware that it is only a matter of time before something, likely something unexpected rather than akin to the highly visible debt kerfuffle over in the Mediterranean, throws the markets into a downturn of some sort.
While we cannot know what specifically will spark the inevitable turn, we suggest investors keep an eye on shifts in the prevailing narratives, such as the belief that central bankers can manage inflation and economies much like a temperature dial, or that Mario Draghi and the European Central Bank will do "whatever it takes to save the euro." We find it interesting to note that the market appears to have utterly ignored the most important part of Draghi's comments, by the way, totally negating the importance of "within our mandate."
If there is a material shift in beliefs, it will likely be time to sit out for a bit and let the dust settle. We'll keep a lookout for you as we contend with what will likely be the normal negative seasonal move in the market during the summer months.