From Power Tools to Carpets, Housing Recovery Signs Mount

[PlanMaestro]

http://online.wsj.com/article/SB10001424127887323375204578268083108322300.html

 

Companies that sell power tools, air conditioners, carpet fibers, furniture and cement mixers are reporting stronger sales for the fourth quarter, providing further evidence that a turnaround in the housing market is taking hold.

 

The results add to data on home construction and pricing that indicate a bottom may have been reached after the sector's long slide. While the incoming data continue to be mixed, evidence that Americans are spending more to build and refurbish homes is raising executives' confidence that the housing market will continue to improve and help fuel the broader economy.

 

[jay21]

What are people's favorite ways to play the housing recovery? I feel like I missed the boat on this one and most things I look at are getting close to fairly priced.

[ItsAValueTrap]

Stocks related to real estate:

 

Homebuilders.  The best-managed ones are LEN / LEN.B, TOL, NVR

Mortgage servicing.  OCN, ASPS, WAC, etc.  *These stocks may be mostly unaffected by a housing recovery.  Their dynamics are very different and are mostly unrelated to home prices or housing transaction volume.

Mortgage origination.  *Not sure how they are affected by a housing recovery. 

Retail / home renovation - Home depot, Bed Bath, etc.

Some REITs, e.g. RESI/AAMC

 

*Long Altisource/ASPS, short KBH (homebuilder).  Because I am short KBH I don't want to see a housing recovery happen... though it is bound to happen eventually.  IMO homebuilding stocks have really high valuations.

[onyx1]

What are people's favorite ways to play the housing recovery? I feel like I missed the boat on this one and most things I look at are getting close to fairly priced.

 

Here's an "all-in-one" solution:

 

"It is not inconceivable to imagine a home buyer spotting a home for sale in a Berkshire owned paper, contacting a Home Services of America real estate agent and taking out a Wells Fargo Mortgage on a new home. The new home might include Shaw Carpet, Ben Moore Paint, MiTek fastners, USG drywall, a Trane heating/cooling system, and Johns Manville insulation, all surrounded by an exterior of Acme Brick (and some components may even have been shipped by BNSF). The closing transaction in some areas could be through one of American Home Services firms.

 

The family would then drive to the new home, turn the Schlage door knob and may decide to fill the space with new furniture from one of Berkshire's regional furniture stores. A John Deere riding lawn mower may be handy for the new yard. And in some parts of the country, the home could use MidAmerican Energy utilities. And DirectTV may be a desirable entertainment option."

 

http://seekingalpha.com/article/1089381-broadly-framing-housing-with-berkshire-hathaway-in-2013

[Olmsted]

I fell into an investment levered to housing recovery by accident.  It's GGC, which was recently involved in an exchange offer with PPG that many small investors played for the odd-lot provision.  It looks cheap right now compared to competitors; I don't think the market has priced its new structure.  Management says a return to normalized housing starts would yield ~$100m in incremental EBITDA, which I think would go straight to the bottom line.  If they trade up to their most comparable competitor's valuation at ~8x EV/EBITDA, a good price range would be from $57.5 on the very bearish end (assuming no cost synergies realized and no improvement in housing) to $81.6 (cost synergies realized and housing returns to normalized starts). 

 

Other thoughts: timber companies, Tronox...

[PlanMaestro]

Bank of America.  ;)

[thomcapital]

What are people's favorite ways to play the housing recovery? I feel like I missed the boat on this one and most things I look at are getting close to fairly priced.

 

Here's an "all-in-one" solution:

 

"It is not inconceivable to imagine a home buyer spotting a home for sale in a Berkshire owned paper, contacting a Home Services of America real estate agent and taking out a Wells Fargo Mortgage on a new home. The new home might include Shaw Carpet, Ben Moore Paint, MiTek fastners, USG drywall, a Trane heating/cooling system, and Johns Manville insulation, all surrounded by an exterior of Acme Brick (and some components may even have been shipped by BNSF). The closing transaction in some areas could be through one of American Home Services firms.

 

The family would then drive to the new home, turn the Schlage door knob and may decide to fill the space with new furniture from one of Berkshire's regional furniture stores. A John Deere riding lawn mower may be handy for the new yard. And in some parts of the country, the home could use MidAmerican Energy utilities. And DirectTV may be a desirable entertainment option."

 

http://seekingalpha.com/article/1089381-broadly-framing-housing-with-berkshire-hathaway-in-2013

 

Some competitors against the BRK lines include MHK (Shaw), SSD (MiTek), EXP (USG), OC (Johns Manville). Not all are pure plays. It seems most names have run quite nicely, with the new home levered, or non/less discretionary-type companies selling up near normalized earnings levels. Others that are more repair/remodel oriented are still being discounted somewhat. For LUK fans, MLI may be worth a look (compete's w/ Cerro Group, owned by The Marmon Group and now Berkshire). Berkshire owned ~10% of MLI back in '04-05 I believe. The one analyst covering the stock thinks $5.50 in EPS at 1.1M starts is doable.

[Guest wellmont]

shld is probably the best way to play it since it hasn't participated at all yet.

[nkp007]

Bank of America is one of the most leveraged ways to invest in American real estate.

[ragnarisapirate]

People are doing things that are nothing short of insane in the world of investment properties... At least that's the case here in Central KY. I hear stories where this is happening elsewhere as well. Short term probably good for the banks, longer term, they are going to get stuck with some really bad collateral- a lot of the people buying these houses have absolutely no idea what they are buying and the eventual expenses that they will get.

 

Even with low interest rates, there is no way that this can go on forever.

[CONeal]

People are doing things that are nothing short of insane in the world of investment properties...  I hear stories where this is happening elsewhere as well.  they are going to get stuck with some really bad collateral- a lot of the people buying these houses have absolutely no idea what they are buying and the eventual expenses that they will get.

 

 

 

Care to elaborate on the above comments? 

[constructive]

What are people's favorite ways to play the housing recovery? I feel like I missed the boat on this one and most things I look at are getting close to fairly priced.

 

Agreed, homebuilders and construction material companies were up huge in 2012. And most of them are not very good companies, just caught in a cyclical updraft.

 

Going forward, some cheap possibilities in addition to Berkshire Hathaway and banks:

hhgregg (HGG) - appliance & electronics retailer

Omnova (OMN) - building products & chemicals manufacturer

Tronox (TROX) - paint manufacturer

Kronos (KRO) / National Lead (NL) - paint manufacturer

DIRECTV (DTV) - satellite TV (benefits from accelerating household formation)

[ragnarisapirate]

People are doing things that are nothing short of insane in the world of investment properties...  I hear stories where this is happening elsewhere as well.  they are going to get stuck with some really bad collateral- a lot of the people buying these houses have absolutely no idea what they are buying and the eventual expenses that they will get.

 

 

 

Care to elaborate on the above comments?

 

Sure, I did over the summer:

 

http://ragnarisapirate.blogspot.com/2012/06/irrationality-in-residential-real.html

 

People have no idea what the hell they are doing, especially when it comes to the types of repairs that these things need- or, how often they need to be made. There are a ton of problems with the majority of the housing stock out there, and people don't see it- this goes for inspectors that are supposed to verify things for the banks as well... The other shoe has yet to drop (at least here) and there are a lot of people that are not going to make the money that they thought they would.

 

In town, one of my lenders was telling me about a veteranarian who was buying a house that he might make 10 grand on... If I was a vet, and a cash buyer, why the hell would I worry about RE? I would rather make bank as a bet and throw off my cash/time into other more lucrative ventures that I or others I know, already know about.

[CONeal]

Thanks for the link and info.  Must have missed this one when I was combing through your site a couple of months back. 

 

 

[lookingstill]

People are doing things that are nothing short of insane in the world of investment properties...  I hear stories where this is happening elsewhere as well.  they are going to get stuck with some really bad collateral- a lot of the people buying these houses have absolutely no idea what they are buying and the eventual expenses that they will get.

 

 

 

Care to elaborate on the above comments?

 

Sure, I did over the summer:

 

http://ragnarisapirate.blogspot.com/2012/06/irrationality-in-residential-real.html

 

People have no idea what the hell they are doing, especially when it comes to the types of repairs that these things need- or, how often they need to be made. There are a ton of problems with the majority of the housing stock out there, and people don't see it- this goes for inspectors that are supposed to verify things for the banks as well... The other shoe has yet to drop (at least here) and there are a lot of people that are not going to make the money that they thought they would.

 

In town, one of my lenders was telling me about a veteranarian who was buying a house that he might make 10 grand on... If I was a vet, and a cash buyer, why the hell would I worry about RE? I would rather make bank as a bet and throw off my cash/time into other more lucrative ventures that I or others I know, already know about.

 

I don't necessarily disagree with some things you said, but just to provide another angle.

 

If anyone remembers, probably not, but a while ago I started a thread here on RE market conditions. I was on the market for an investment property in Southern California. Started looking last May, got serious about it in the summer. For a personal reason was limited to a small area, so had to agonizingly wait for the right property while prices were rising around me.

 

Several weeks ago closed on the property that satisfies my "personal reason" criteria.  The HOA there is in construction litigation, so cash buyers only, which worked for me since I was cash and allowed me to get "summer price" versus what things are going for now.

 

Basically, I paid for it about 15% higher than the absolute bottom that was here about a year ago. But what I paid was exactly the amount the seller paid when she purchased it in November 2002. She didn't make anything on it, in over 10 years.

 

The way I look at it. I paid what she paid at the end of 2002. But what a dollar is worth now is not what it was worth then. So, basically, it is cheaper. I'm planning to rent it out with cash on cash return of about 5.5%. With the prices where they are, I could probably sell it now wtih about 8% return, probably more after the lawsuit settles. (Not that I'm planning to.) It should be an ok inflation hedge. It diversifies me away from the stock market, in which I also have substantial part of my net worth. Even if the prices fall somewhat near to mid-term, I don't have a mortgage on it. And it should bring some income being a rental. It is a condo, so HOA takes care of the "outside" maintenance, newer construction, being built in 2001. I agree that the prices, especially here in So. Cal. went up too much, too fast. But I don't see anything particularly wrong with what I just did. Maybe I'm missing something critical?

 

I'm planning to hold it for a long time (20-30 years), being happy with income from renting it and the idea that this money is somewhat protected from potential inflation in this cheap/abundant money environment. If I get appreciation in addition to rental income - great, if not for a good long while, that's fine with me as well. Even if at some point the prices go lower, it is easier being under water when you have no mortgage. That's the way I look at it. Maybe I'm totally off base and you, guys, could point it out. I'd appreciate it.

[PlanMaestro]

http://www.ft.com/intl/cms/s/0/628cc9c4-7088-11e2-85d0-00144feab49a.html

 

http://farm9.staticflickr.com/8235/8486577215_946cf2f98f.jpg

[no_free_lunch]

Lookingstill,

 

I think what you are doing is a VERY good idea.  The future of the stock market is uncertain and you have major players betting that a significant decline could be had.  In the 30's the market went down what 89%?  Who's to say we couldn't see a 70%+ decline given the monstrous debt loads today.  It is smart in this scenario to be diversified.

 

The one thing is though, have you considered upkeep in your 5.5% return?  Property upgrades & maintenance are not cheap unless you have time to DIY.

 

If you can get 5%+ after all expenses from the rent + match inflation on price appreciation then you are about matching the long-term return of equities.  If you can do this plus have a sizable stock portfolio I think you will do just fine.  I would just keep in mind that property appreciates roughly at inflation so plan to exit when you see RE prices well ahead of inflation.

[lookingstill]

Lookingstill,

 

I think what you are doing is a VERY good idea.  The future of the stock market is uncertain and you have major players betting that a significant decline could be had.  In the 30's the market went down what 89%?  Who's to say we couldn't see a 70%+ decline given the monstrous debt loads today.  It is smart in this scenario to be diversified.

 

The one thing is though, have you considered upkeep in your 5.5% return?  Property upgrades & maintenance are not cheap unless you have time to DIY.

 

If you can get 5%+ after all expenses from the rent + match inflation on price appreciation then you are about matching the long-term return of equities.  If you can do this plus have a sizable stock portfolio I think you will do just fine.  I would just keep in mind that property appreciates roughly at inflation so plan to exit when you see RE prices well ahead of inflation.

 

Thank you, no_free_lunch.  The property is currently in a very good condition. it is a fairly recent construction, being built in 2001. And the previous owner took good care of it, she completely repainted it before selling, the floors are mostly slate and hardwood in good condition. There is a little carpet, but it is about 6 months old and is of a good quality. The seller paid for a year of home warranty for the appliances and such. There will be at least one month rent as a security deposit and of course I'll be creating a cushion for unforeseen expenditures.

 

Value investing is about buying assets which are currently undervalued. And the way I look at it, if I can buy an income producing asset for what it was selling ten years ago, and in today's dollars, it is not bad. Basically, an undervalued stock with 5% (and likely to be growing over the years) dividend, that should keep up with inflation and help me to preserve my principal. Of course it is much more work than just owning a stock, but being a landlord also could be a good hands-on learning experience.

[mcliu]

Not sure if I agree with your assessment. Investing should be prospective based on your expected returns and discount rate. Just because the price is the same as it was 10 years ago doesn't mean it's a good deal. Ex. Intel traded at $74 per share in late 2000 vs. $21 per share today, doesn't mean it's undervalued.

[lookingstill]

Not sure if I agree with your assessment. Investing should be prospective based on your expected returns and discount rate. Just because the price is the same as it was 10 years ago doesn't mean it's a good deal. Ex. Intel traded at $74 per share in late 2000 vs. $21 per share today, doesn't mean it's undervalued.

 

I understand. But we are not talking about Intel. :) RE prices were, and in some areas are still severely depressed. And in the context of low interest rate environment and a lot of money printing, RE values should come up. Don't know when and by how much, but RE market should recover.

[PlanMaestro]

Jim the Realtor from San Diego. How things have changed in a couple of years.

 

[jay21]

Also might be worth noting that a lot of the big banks are changing their forecast of home prices this year.  About 1% higher appreciation than the beginning of the year forecast.  This could impact a lot of underwater borrowers and we might see some more prepay activity.