In response to the Master Kass on our sister Web site, Street Insight, I feel compelled to update readers on my outlook for homebuilders and the housing market.
I am not bullish on the housing market. I think one can get rich shorting New York City condos. I was not bullish last summer when I recommended
, which is up 100% since. I fully expected the housing market to decline modestly in units for a few years.
However, the shares were down, and cheap when I purchased them. They have been monster stocks since, short wreckers if you will. I liked the stocks, even with my negative outlook for housing.
For sophisticated investors, the concept is called discounting. The builders were discounting a collapse in the housing market. Anything less negative, like a stronger market, would drive the shares higher. And that is exactly what happened.
Also, there was the secular market-share-gain story of the large public builders. The best way to summarize this is to say that the big builders have a
higher share of developable building lots than deliveries. Even in a difficult market, I expected the large builders to hold revenue better than the industry.
As for the housing market today, it's more frothy than this time last year. Personally, I will not purchase a piece of property until the Resolution Trust Corp. II in the next few years.
If Greenspan had a clue (remember, he didn't have one in the tech bubble, or maybe he did), he would jawbone the banking industry to tighten or even strangle lending standards for residential real estate. He should not kill the entire economy to slow the real estate markets. Now that bag people can buy condos in Phoenix with no down payments, maybe the
should get involved. You can't expect mortgage bankers to do anything, they get paid to lend money.
But like Greenspan's unwillingness to raise margin rates in 1999, I expect him to do nothing until the market declines. Then, the taxpayers will be on the hook for the stupidities of the real estate speculators. Remember, I expect a sequel to RTC in the future.
How does this outlook impact my investment process these days? Like Doug, I believe that the real economy is at risk to a property collapse. But I cannot invest as if the world will end tomorrow. I could be wrong about real estate; the economy may handle a real estate bear market better than I expect. The bull market in property may persist for another few years.
People who compare this situation to the tech bubble are silly. Many tech stocks traded for 10 times what they were worth as businesses. Few think real estate is anywhere near that overvalued.
I still own some homebuilders, but they are up a ton and I have "rung the register" on the way up. I own many economically sensitive stocks; they too are down big and cheap -- just like the homebuilders of last year.
If the economy muddles through, I expect to make a lot of money in these stocks. If the world ends, I will have to invest more defensively. I pay a lot of attention to the macro data. But, I would feel much better if the Fed took some steps to temper the enthusiasm in the real estate markets. We don't need to deal with the aftermath of another Fed-induced bubble.
RealMoney subscribers can
click here to read Doug Kass' bearish outlook on housing.
At the time of publication, Marcin was long KB Homes, although positions may change at any time.
Robert Marcin is the founder and general partner of Defiance Asset Management. Formerly, Marcin was a partner at Miller, Anderson & Sherrerd and a managing director at Morgan Stanley, where he managed the MAS Value fund (currently Morgan Stanley Institutional Value). Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Marcin appreciates your feedback;
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