For the past 18 months, starting with "Time to Move Out," I've written several columns detailing the issues facing the housing industry and have advised either selling positions in the homebuilders or at least avoiding the sector completely.
With the Toll Brothers (TOL) fiscal third-quarter earnings report yesterday showing falling revenue and earnings, this is a good time to address the situation again.
Only two of the largest eight publicly traded homebuilders have a stock price above where it was 18 months ago, when I first advised selling the builders because of macroeconomic headwinds the industry was facing.
Those two are DR Horton (DHI) and Lennar (LEN), up 22% and 18%, respectively, over that time period, inclusive of today's broad-based rebound in equities.
Toll Brothers is down 5%, Ryland Group (RYL) down 3%, PulteGroup (PHM) down 4%, Beazer Homes USA (BZH) down 24%, KB Home (KBH) down 27% and Hovnanian Enterprises (HOV) has declined by 72%.
As poor as this performance is, it is still much better than I think is warranted for most of them, with the three poorest performers being indicative of where the rest should be trading.
All of the fundamental issues I wrote about with respect to the consumer's ability and desire to access debt for a home purchase are worse today than they were a year and a half ago, and yet throughout this period the prevailing financial media meme with respect to housing has been that it is recovering with a boom in housing sales due to pent-up demand being imminent.
That message has become almost ubiquitous, with any negative indicators being spun as the opposite.
The most recent example of this is in the commentary included with Zillow's (Z) July real estate market report released this morning, in which the data showed that home price appreciation went negative month to month in July from June, housing activity in entry level, mid-tier and high-end homes is slowing, and homes are staying on the market longer.
Zillow's chief economist, Svenja Gudell, states that this is "good news, particularly for buyers, because it will ease some of the competitive pressure."
Instead of rising rents being empirical evidence of the fact that consumers, especially younger adults, are either choosing to rent or can't qualify for a mortgage, the media meme has increasingly been that these are just future buyers. And the meme goes further, that the longer they don't buy and the larger the group becomes, pent-up demand increases and will eventually result in a surge of home purchases that will drive up home prices, homebuilder stocks, the stock market overall and the economy.
With respect to Toll Brothers, one of the prevailing memes has been that it isn't impacted by the decisions made by younger adult consumers because it builds aspirational homes for older, more established consumers.
The problem with this, of course, is that the Toll Brothers buyer also has to sell his current mid-tier home to a move-up buyer, who has to sell her starter home to a first-time buyer in order for Toll to sell their properties.
A prevailing meme with respect to consumer attitudes has been that the auto sale increases of the past few years are a precursor to an increase in home purchases.
The reality, of course, as I last addressed in the June column, "The Changing American Dream: From House to Car," is that the increase in auto sales actually prevents those same consumers from buying a home.
As I discussed in another June column, "Here's a Better Way to Invest in Housing," rather than buying the homebuilders in the hope that renters will become buyers, just buy the companies that own the rentals.
In the past two months, as the stock market has pulled back, all of these companies have, too, but not by nearly as much as the homebuilders.
Avalonbay Communities (AVB) and Mid-America Apartment Communities (MAA) are up by 1% and 4%, respectively, during this time, while Essex Property Trust (ESS), Camden Property Trust (CPT) and Forest City Enterprises (FCE.A) are off by 3%, 5% and 8%, respectively.
And everything that is a headwind for the builders is a tailwind for the rental property owners.