The Bernanke Asset Bubble continues to lift housing... And it's now creating shortages.
U.S. single-family home prices ended 2012 with the biggest annual gain in more than six years... Prices jumped 6.8% for the year – the highest gain since July 2006. Data from the S&P/Case Shiller Home Price Index shows prices in the 20-city index increased 0.9% in December on a seasonally adjusted basis, beating expectations of a 0.5% gain.
"We need to build more homes," David Blitzer, chairman of the S&P 500 Index Committee, told CNBC. "We hear stories about shortage of supplies. The medium-term outlook over the next two to four years for home construction – especially single-family homes – either looks very good or everyone will be living in apartments, and I don't think the latter is what will happen."
In New York City, where I (Sean Goldsmith) live, housing inventory is at its lowest level in close to a decade. Last night at dinner, a friend told me he received a substantial, unsolicited bid on his apartment.
He also told me he was looking to purchase an apartment in a yet-to-be-constructed building in the West Village (a particularly pricey part of town). The 91-unit development is currently just a hole in the ground... But when he asked the broker for information on the property (just after the initial offering), she said more than 70 units have already sold. The only apartments left were listed at more than $12 million.
"Product has dried up, there's not much available, and I don't see a sudden surge of properties coming onto the market," Dottie Herman, the chief executive of New York-based real-estate brokerage firm Douglas Elliman, told the New York Times.
Elliman's listing inventory fell to 4,749 apartments in the fourth quarter – the lowest in 12 years. Herman believes home prices could rise 5%-10% in 2013 due to the lack of inventory.
Nationwide, sales are surging... New home purchases in the U.S. jumped 15.6% in January to a 437,000 annual pace, the highest since July 2008.
But builders are quick to pick up the slack... U.S. builders broke ground on 613,000 houses last month... the highest number since July 2008 (and up 0.8% from December).
In 2012, builders started on 779,900 homes, up 28.1% from 2011. But we're still a long way from the 2005 peak of 2.1 million home starts (a three-decade high).
Housing is no longer the value it was three years ago. But there are still some deals in secondary markets. As Porter wrote in the January 25 Digest Premium...
Today, you might not be able to buy trophy properties in the prime markets [like I did in Miami Beach in February 2011... I paid about $400 a square foot. Similar properties are now selling for between $800 and $1,400 a square foot.] But I think there are still values in the secondary markets. For example, Steve Sjuggerud has been writing a lot about cheap houses in Orlando. You might also look in places that have big college communities, like Gainesville, Florida or Austin, Texas.
The point is, you want to take advantage of the extremely low interest rates to buy rental properties that are easy to maintain and rent.
I'm generating 15%-20% pretax yields on my various real estate investments. And I think I can eventually book a large capital gain from all this real estate.
Low mortgage rates, the lack of cheap investment alternatives, and the relatively high yield will continue pushing money into the real estate sector.
Brookfield Residential Properties, a homebuilder that is majority-owned by Extreme Value holding Brookfield Asset Management, believes the real-estate recovery in the U.S. is in its early stages.
"We're just at the beginning [of the recovery]," Brookfield CEO Alan Norris told Bloomberg. "If you take a look at our numbers, all of our profit is from Canada. We're only just starting to get to the point where the U.S. is going to be contributing."
The company bought land during the real-estate crisis and now owns nearly 50,000 building lots in the U.S. It's the fifth-largest property developer in the U.S. and Canada.
"When land is moving and market cycle is good, it's a very, very profitable business," Norris said. "We kept telling people land is going to become a big issue as the recovery takes hold in the U.S. Now that has transpired and it's exactly as we laid it out."
With the market trading near its highs, it's difficult to "hold your nose and buy." While the tailwinds for a further market rally are strong (credit expansion and zero-percent interest rates), the market doesn't appear to be cheap.
That's why we asked True Wealth Systems editor Steve Sjuggerud and analyst Brett Eversole to tackle the question... Should you be buying stocks today? Steve studied 100 years of market history to see if it's better to buy stocks at new lows or new highs. You can see Steve's piece in today's DailyWealth.
Also, don't miss the essay Steve provided for the Digest below... He explains why stocks should actually be much more expensive than they are today, based on historical interest rates.
New 52-week highs (as of 2/25/13): Constellation Brands (STZ).
In today's mailbag, some feedback on the DailyWealth piece we published yesterday (scroll to the bottom of yesterday's issue to read it). And be sure to read Steve's new essay below. Please send your feedback to feedback@stansberryresearch.com.
"I am a S&A Alliance member and when I read Dr. Sjuggerud's comments this morning regarding an improving economy (i.e. a growing GDP) does not equate to positive stock returns, it took me back to a paper I wrote in 2005 when I was obtaining my Masters in Finance. While I reached a conclusion that there was a correlation where stock prices peaked prior to a peak in GDP (by one quarter) I did not have the same insights as Dr. Sjuggerud. Excellent commentary, sure wish I would have studied with Dr. Sjuggerud." – Paid-up subscriber John Lembo
Regards,
Sean Goldsmith
Baltimore, Maryland
February 26, 2013
Is the Stock Market Cheap? What Is Important in Stock Prices Today?
By Steve Sjuggerud
What makes a stock "cheap"? When is the overall market "cheap"? Many investors see daily headlines on stocks being cheap, fairly valued, or expensive. But what do the numbers say?
Today, I'll share what history says about stock valuations. Specifically, I'll share the true fair value for the overall market... and more importantly, the fair value of the market today. Our results may surprise you...
For our valuation test, we looked at the most common measure of a stock's value, the price-to-earnings (P/E) ratio.
It is easy to understand. For example... Say you're looking to buy a $150,000 investment property that pays you a net rent of $10,000 in a year. You're buying that property at a P/E ratio of 15 – the price (P) divided by the net rent or earnings (E).
Since 1950, the stock market's average P/E ratio has been 17.8. Anything higher than that level is traditionally considered expensive. And anything lower is traditionally considered cheap.
As I write, the overall market trades a P/E ratio of around 17... So most folks would consider stocks fairly valued today. But they're wrong...
You see, the simple P/E ratio is too simple today... What most people don't know is there is a strong relationship between P/E ratios and interest rates.
The numbers are downright crazy. And with interest rates at zero percent today, these numbers REALLY work in our favor...
|
P/E ratio
|
% of the time
|
|
|
Average of all periods since 1950
|
17.8
|
100%
|
|
Average when rates are above 6%
|
12
|
25%
|
|
Average when rates are below 2.5%
|
21.8
|
27%
|
You see, when short-term interest rates are punishingly high – above 6% – the average P/E ratio of stocks is low... It's only 12.
But when short-term interest rates are low – below 2.5% – the average P/E ratio of stocks is high. It's 21.8.
Judging by this table, what should the stock market's P/E ratio be? Today, we have the lowest rates in history – well below 2.5%. The stock market's P/E ratio should be at least 21.8, based on evidence over the last 60 years.
The next time you hear someone discuss stocks being expensive or even fairly valued, you'll know the facts... With interest rates this low, history says stocks should be much, much more expensive than they are today.
Good investing,
Steve Sjuggerud
The answer is simple... Dell's cash flows will remain steady after the takeover. And since the company will be higher leveraged, Michael Dell will personally make more cash on his equity. I have seen Michael Dell's strategy pay out again and again and again and again and again... and it makes me furious. Look at what's happening with Heinz... where 3G Capital, a Brazilian private-equity firm, (with an assist from billionaire investor Warren Buffett) is spending $28 billion to acquire the food-products giant... Again, it's going to end up being a terrible deal for Heinz shareholders. These investors borrow a bunch of money and buy a great cash-flowing business. But the company's management should have done that for the public shareholders. The people running Heinz should not be selling... Their brand is irreplaceable. And all of the long-term goodwill accrued by that brand is going to end up in the hands of financial operators, namely Buffett and 3G Capital. Personally, I think that's criminal. I think these guys have a fiduciary obligation to the common shareholders, and they're completely getting away with ripping the faces off their shareholders.