Americans outraged over the price of gasoline and the sensational profits of oil companies of late should stop a moment and look inward. Not at their souls, but at their homes -- which have appreciated in value at least as much as gasoline, and in many cases much more. According to U.S. Census data, the price of the average home in Los Angeles is up 112% in the past five years, 106% in Miami and 91% in New York. Meanwhile, unleaded gasoline futures traded at the New York Mercantile Exchange are up only around 85%. By the logic of consumers calling for the heads of oil company executives, homebuilders and real estate brokers ought to be on the hot seat too. The fact that all wrath is directed toward energy producers shows a bubbling hostility for the boom-and-bust dynamics of capitalism among those who feel left out of the rising tide of economic growth. The anger also seems to show that energy investing has simply not caught the fancy of the public in the past couple of years in the way that technology investing did back in the 1990s. A lack of widespread jubilation over the terrific escalation in the price of oil company stocks -- as there has been over home prices -- shows that, as I suggested in my
column two weeks ago , they probably have a lot farther to go.
But in the longer term, the homebuilders' advantage is striking. The stocks of the country's two largest homebuilders, Pulte Homes ( PHM) and D.R. Horton ( DHI), are up 580% and 460% over the past five years, respectively, while the shares of the two best-performing major international oil companies, Total ( TOT) and BP ( BP), are up 101% and 47%. Both groups, of course, have beaten the broad market, which has lost a fifth of its value since September 2000.
Most homebuilders are taking their enormous profits of late and plowing them right back into their businesses by buying more land and bulldozers. They might buy smaller homebuilders that have rights to good land, or just buy more land themselves. By the same token, energy companies are taking their sizable profits and purchasing new oil and gas blocks from governments around the world, as well as new equipment to do the drilling.
Ultimately, the mismatch between too much new supply and too little demand leads to the next bust. We saw that in technology in 2000, we saw it with energy in 1998, and you can be sure we're going to ultimately see it in both housing and energy. The only question is when. Considering that supply is still constrained (with OPEC unable or unwilling to provide marginal new oil, and new sources not yet tapped) and that the public has not yet become enamored with energy stocks and that companies' price/earnings multiples are still low, one can only guess that the balance of supply and demand is not yet on the six-month horizon. So while there will inevitably be ebbs and flows in the price of oil, it's likely to remain at least locked in the current range between $45 and $65 a barrel, with occasional excursions higher in the face of disruptions such as additional Gulf Coast hurricanes, West African labor disputes, Venezuelan fiscal instability and Saudi Arabian political instability.