Tuesday, January 18, 2011
The Bloomberg index of major home builders' stocks is once again at a post-recession high, up almost 150% from its March 2009 low. That low occurred right around the time that home prices, according to the Case Shiller index, hit bottom (considering the 2-3 mo. lag built into the Case Shiller index). I also note that the home builders' index peaked in mid-2005, about 6 months before home prices peaked.
Today, many are arguing that home prices are set up to decline to new low levels—given an expected surge in foreclosed homes being dumped on the market—but equity investors are either ignoring that news or (more likely) seeing signs of improvement in the housing market. Since housing starts have been basically flat and at very low levels for almost two years, I think the picture that emerges is one in which the coming supply of foreclosed homes is effectively offset by the combination of a multi-year dearth of new construction and the ongoing increase in new household formations. In short, after a wrenching 5-yr period of adjustment, the housing market has found a new equilibrium, and the equity market is "looking across the valley" of bad news to an impending recovery in home prices.
Posted by Scott Grannis at 11:06 AM