Investors waiting for the housing market to finally turn may have a long time to wait.
As we were reminded this summer with real estate statistics that were stark in their disappointment, the home market is far from healthy.
Stocks of homebuilding companies have been laggards as a result. The SPDR S&P Homebuilders ETF (NYSE: XHB) is down -3% in the last 12 months, while Wall Street is up about +9%. And big dog Pulte Group (NYSE: PHM) is off -13% since January 1.
The decimation in the group has some suggesting that now is the time to buy. Not me.
If anything I’m betting that homebuilding stocks will not only lag an otherwise strong market, some names in the group may very well lose value.
That’s not a promising outcome if you are looking for positive returns in your stock portfolio.
There are many reasons for my pessimism on the group. One name I would particularly avoid is Toll Brothers (NYSE: TOL), a builder that caters to the higher bracket buyer.
With the Bush tax credits set to expire and a banking industry having trouble lending to even the best credits, the top end of the real estate market is due for more losses.
Here’s an interesting story.
I’m currently involved in a private company that provides capital to the distressed consumer credit market. The investors in this company are all accredited with high net worth and/or large income.
They are the kind of borrowers that banks fawn over during normal times, but these are far from normal times.
Recently, and independently, the investors in this group all shared stories of having difficulty obtaining financing on their homes. Each story was different, but the outcome was the same.
It took time, effort and much frustration prying money from a bank even with the best of credit behind them.
I suspect those sort of stories are playing out across the country resulting in the slow pace of action in the real estate market that we are seeing today.
Many, and I agree, say that home prices have farther to fall.
As for Toll Brothers, at the current price of $18.50 the stock trades for 1.2 times a book value of $15.08. Historically a good time to buy a homebuilding company is at a price of 80% of book value or less.
What happens if book value declines? Toll’s valuation becomes all the more expensive.
Over the next year, I expect Toll’s book value to decrease as prices on the high end of the market decline. As such I would avoid the stock completely until its price falls to at least 80% of current book value.
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