“Tapping this data (land availability “elasticity scores”), economists Atif Mian at Princeton University and Amir Sufi at the University of Chicago’s Booth School of Business have shown that more constrained areas saw bigger booms in the housing bubble—but also bigger busts on the way down.”, Wall Street Journal, February 27, 2014

“Again, the truth is emerging. The U.S. housing bubble and bust was caused by many factors: Interest rates being manipulated too low for too long by the Fed; indirectly fueling artificially low mortgage rates through the structuring/tranching of variable-rate CMO debt (from fixed rate mortgages/MBS, because of prepayments) and also causing investors to chase riskier assets for yield. A flood of foreign capital investment into U.S. Treasuries, GSE debt and MBS, and then in search of yield, into riskier, private mortgage backed-securities, driving rates down and demand up, further. The government’s well-intended push to significantly expand homeownership opportunities (As the Chairman of Fannie Mae Frank Raines said to our advisory committee, “The mortgage industry has had a 99% success/1% failure model. Why not go to a 95% success/5% failure industry model, if we can expand U.S. home ownership dramatically.”). And the Clinton era $500,000 capital gains tax break for homeowners (every two years), which piled on to all of the above and I believe in hindsight encouraged a group of Americans to speculate on single family homes. And now we have a huge and important point being made here; a basic supply and demand problem. While the U.S. housing market is massive, only a small percentage of existing homes come on the market in any given year (existing supply) and new construction (additional new supply) is severely restricted in many major regional markets as a result of land constraints. The home price appreciation and depreciation data since 2006, support this article’s thesis: that the U.S. housing bubble and bust was exacerbated in regional markets by the relative inelasticity in the supply of land for housing development. The truth is emerging. Let’s briefly review. Pre-crisis, similar housing bubbles occurred in many developed countries (and burst around the same time as the U.S.), that never had a private mortgage and/or MBS market like the U.S.. This clearly disapproves the majority view of The Financial Crisis Commission and mainstream press (plaintiff’s attorneys and short sellers) thesis that U.S. mortgage lenders were the primary cause of the housing bubble. And today, housing bubbles in diverse places around the world like Norway, Canada, and China, do the same. And think about the recent rise in U.S. home prices since the U.S. bubble burst; 21% since hitting bottom in 2012. That increase, which few predicted in magnitude and speed (far outstripping economic and income growth during that time), has occurred despite there being virtually no private mortgage and MBS market in the U.S. and at a time that the Federal Reserve is touting its monetary policies and QE as the reason that stocks, bonds, and real estate prices have risen. In my opinion, given all these facts, it defies logic that pre-crisis U.S. private mortgage lenders would still continue to be blamed for being the primary cause of the unsustainable U.S. housing bubble.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Excerpts from February 27, 2014 WSJ article: “Place Bets Carefully on Homebuilders”:

“The crucial difference between housing markets in places such as San Jose, Calif., and Austin, Texas—more important than considerations like quality of life—is the availability of land, according to Massachusetts Institute of Technology economist Albert Saiz.”

“Mr. Saiz gave each metro area an “elasticity score”—the higher the number, the easier it is to put up a home. San Jose scored 0.76, ranking it the 10th most constrained among the 100 largest areas by population.”

“Mr. Saiz found the scores correlate with other constraints, such as zoning and taxes. Since he did his analysis, the scores have likely changed only a little, if at all, as they reflect land-use fundamentals.”

“Tapping this data, economists Atif Mian at Princeton University and Amir Sufi at the University of Chicago’s Booth School of Business have shown that more constrained areas saw bigger booms in the housing bubble—but also bigger busts on the way down.”

“While house prices in constrained areas have bounced around more than in less-restricted areas, they also have done better over the long haul. Consider two gauges of home prices, one made up of the 10 most elastic areas in 20 separate S&P/Case-Shiller metropolitan home-price indexes, the other of the 10 least-flexible areas. The latter is more volatile but up 65% since January 2000. The former is up 39%.”

“Constrained builders, conversely, must navigate markets where securing land can be tricky and there can be sudden price declines. But when prices rise, they can do very well, making them more suited for investors with a broadly bullish view on U.S. property.”

“With house prices supported to some extent by ultralow interest rates—and the vagaries of Federal Reserve tapering—buying America’s builders is especially fraught with uncertainty.”

HEARD ON THE STREET

Place Bets Carefully on Home Builders

By

JUSTIN LAHART

Updated Feb. 27, 2014 5:40 a.m. ET

Home buyers know that location is all. But it also is critical to investing in builders.

After hitting a 14-year low, loans are starting to flow back in the home construction industry. But investors eyeing the home-builders need to know that more than ever, it really is all about location, location, location. Heard on the Street’s Justin Lahart discusses on MoneyBeat. Photo: Getty Images.

Digging into where these companies stake out their ground offers a way of playing house-price trends, whether investors feel bullish or fear that rising interest rates will undermine prices. While exchange-traded funds often make it tempting to simply bet the sector, investors should recognize that exposure to different housing markets make, say, Toll Brothers a very different company from D.R. Horton.

So home builders shouldn’t be lumped together. Yet they often are, with multiples of book value and earnings clustered around the sector median for most members of Standard & Poor’s broad index of home-builder stocks.

The crucial difference between housing markets in places such as San Jose, Calif., and Austin, Texas—more important than considerations like quality of life—is the availability of land, according to Massachusetts Institute of Technology economist Albert Saiz. For a 2010 paper in the Quarterly Journal of Economics, he used satellite-based data to determine the amount of land available for development in 269 U.S. metropolitan areas, covering roughly three-quarters of the population. The more hills and other impediments an area has, the less land can be developed.

Mr. Saiz gave each metro area an “elasticity score”—the higher the number, the easier it is to put up a home. San Jose scored 0.76, ranking it the 10th most constrained among the 100 largest areas by population. Austin, scoring 3.0, ranked a decidedly easier 88th. The range for all 100 was 0.6 to 5.5. Mr. Saiz found the scores correlate with other constraints, such as zoning and taxes. Since he did his analysis, the scores have likely changed only a little, if at all, as they reflect land-use fundamentals.

Tapping this data, economists Atif Mian at Princeton University and Amir Sufi at the University of Chicago’s Booth School of Business have shown that more constrained areas saw bigger booms in the housing bubble—but also bigger busts on the way down.

So home builders’ fortunes—and risks—are tied to where they sell houses. Those heavily concentrated in more constrained areas suffered for it. Among them: one-time stock market darling WCI Communities, a Florida-based builder that filed for bankruptcy protection in 2008.

While house prices in constrained areas have bounced around more than in less-restricted areas, they also have done better over the long haul. Consider two gauges of home prices, one made up of the 10 most elastic areas in 20 separate S&P/Case-Shiller metropolitan home-price indexes, the other of the 10 least-flexible areas. The latter is more volatile but up 65% since January 2000. The former is up 39%.

Getting a precise bead on the builders’ exposures to different cities isn’t possible and constraints can differ markedly even within cities. The delineations of the metro areas Mr. Saiz used are slightly different than what the Census Bureau now uses. But data on communities where the builders sell homes serve as a useful proxy.

To analyze this, The Wall Street Journal paired Deutsche Bank’s community counts for 15 listed builders with Mr. Saiz’s scores. Each metro area in which a builder operates is weighted: If it has 10 communities in the Dallas area and five around Miami, Dallas matters twice as much. The small fraction of communities not within the areas Mr. Saiz analyzed is excluded.

TRI Pointe Homes scores lowest at 0.9, indicating it is weighted toward more constrained areas. The California builder has moved to broaden its portfolio, agreeing late last year to buy Weyerhaeuser‘s home-building business. Still, at the time, TRI noted that business had ownership or control of “approximately 27,000 lots primarily located in high-growth, lot-constrained markets.” Other builders with low scores include Toll and M.D.C. Holdings.

At the other end of the spectrum is LGI Homes, scoring 2.2, with its large number of communities in Texas. The likes of LGI—along with Horton and Ryland Group, which also score highly—should offer investors relative insulation if house prices crack. In periods of growth, they should generate steady profits as they buy land, build on it and sell. Their biggest risk may be that they operate in markets where barriers to entry are lower.

Constrained builders, conversely, must navigate markets where securing land can be tricky and there can be sudden price declines. But when prices rise, they can do very well, making them more suited for investors with a broadly bullish view on U.S. property.

With house prices supported to some extent by ultralow interest rates—and the vagaries of Federal Reserve tapering—buying America’s builders is especially fraught with uncertainty. Rather than being all over the map, investors can, and should, pick their spot.

Write to Justin Lahart at justin.lahart@wsj.com

 

Posted on February 27, 2014, in Postings. Bookmark the permalink. Leave a comment.

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