A Cheap Play on Housing

Home prices keep rocketing higher. The latest S&P CoreLogic Case-Shiller home price index out today showed a year-over-year national rise of 19% in January. Since the post-financial crisis low -- the index bottomed in early 2012 -- home prices are up 110%. My colleague Shaina Mishkin has more on the latest data here, including the cities seeing the biggest gains. 

The surging prices continue to cause pain for first-time buyers who are getting priced out of homes. Stock-market investors are facing a different problem, though. The companies building those homes continue to lose value, and they now count as the cheapest assets in the entire stock market. Leading home builders like D.R. Horton, Lennar, and Toll Brothers are all down around 30% this year. 

Barron's Andrew Bary writes today that the housing sector currently trades at just four times earnings. Put another way, shareholders are paying four bucks for each dollar that homebuilders are forecast to earn in 2022. For stocks, it doesn't get much cheaper than that.

The average company in the S&P 500 is currently valued at 20 times 2022 earnings. Even left-behind car manufacturers like General Motors trade at roughly seven times earnings. 

So what explains the disconnect? Andrew points to a combination of factors holding back the stocks, including a shortage of parts like garage doors and the potential for falling demand as a result of rising interest rates and sky-high prices that limit the pool of buyers. 

"The industry is probably in its best shape ever, with strong balance sheets and increasing capital returns to shareholders, mostly stock repurchases," Andrew writes.

For prospective home buyers waiting for prices to cool, it might not be a crazy idea to take a few dollars from those down-payment savings and put it toward the home stocks. Andrew makes a strong case for Toll Brothers, in particular, which trades roughly in line with its book value, or the net worth of the company's total assets. 

Toll is differentiated from its peers thanks to its luxury focus. The affluent buyers of its high-end homes — whose average price is close to $1 million — tend to be selling homes that have appreciated and are thus less sensitive to changes in mortgage rates.

You can read the rest of Andrew's story here. The stocks may already be coming around. Toll Brothers was up 4.4% today, while Lennar and PulteGroup rose 3.9% and 3.5%, respectively.