Real Estate Stocks: Is Home Ownership a Bad Investment?

Today's history lesson: Investing in home real estate has shown itself to be a bad investment. A real shocker, considering it defies the universally accepted idea that owning a home is the best investment anyone can ever make.

This information is highlighted by the recent Journal of Wealth Management paper "Measuring Residential Real Estate Risk and Return."

It points out what we already know: Yes, the overall housing trend for the 19-year period 1987-2005 was upward. CBS News adds, "The run-up in home prices was so great that for the 10-year period 1997-2006, the nominal and real returns were 9.7 percent and 7.1 percent, respectively. And from 2000 through 2006, the figures were 11 percent 8.2 percent, respectively."

This sounds great, so what's the problem? Well, a 19-year timeline doesn't exactly encompass the history of the housing market. It's actually biased, reflecting a tendency to give too much weight to recent experience while ignoring long-term evidence.

The real lesson
"Knowledge of the historical evidence would have led to the conclusion that prices don't go straight up. In fact, in just the period 1972-1984, the U.S. had experienced three boom-bust cycles in housing prices: 1972, 1978 and 1984... For the period 1890-2005, inflation-adjusted home prices rose just 103 percent, or less than 1 percent a year."

Indeed, inflation is pretty important when it comes to homeownership. Another example, made by Yale professor Robert Shiller, is a home in 2005 sold for 10 times the price it sold for in 1945. "While that produces a simple return of 900 percent, the real (inflation-adjusted) annualized return was less than 1 percent." Ouch.

This doesn't even account for the costs of living in your own home, like significant transactions costs, closing costs, property taxes, maintenance, and improvement costs.

Business section: Investing ideas
We've all heard the saying and have been forced to acknowledge (again and again) that history is doomed to repeat itself. So, housing markets go down, and then they go up again. And when they go up, we will once again imagine it is wise to invest because the market can never go in any other direction.

Folly? Yes. Investment opportunity? You betcha.

To trade on the trend, we considered residential construction companies, whose revenue is closely tied with housing demand.

Here are the 10 largest U.S. residential construction companies trading on the American stock exchanges. (Click here to access free, interactive tools to analyze these ideas.)

1. DR Horton: Operates as a homebuilding company in the United States. Market cap of $4.47B. The stock has gained 17.08% over the last year.

2. Lennar: Operates as a home builder and provider of financial services in the United States. Market cap of $4.07B. The stock is a short squeeze candidate, with a short float at 22.13% (equivalent to 5.06 days of average volume). The stock has gained 11.72% over the last year.

3. Toll Brothers (NYSE: TOL  ) : Engages in designing, building, marketing, and arranging finance for single-family detached and attached homes in luxury residential communities in the United States. Market cap of $3.75B. The stock has gained 9.8% over the last year.

4. NVR: Operates as a homebuilder in the United States. Market cap of $3.55B. The stock is a short squeeze candidate, with a short float at 6.35% (equivalent to 7.81 days of average volume). The stock has lost 7.22% over the last year.

5. PulteGroup (NYSE: PHM  ) : Engages in homebuilding and financial services businesses primarily in the United States. Market cap of $2.97B. The stock has had a good month, gaining 18.87%.

6. MDC Holdings (NYSE: MDC  ) : Engages in homebuilding and financial services businesses in the United States. Market cap of $1.06B. The stock has had a couple of great days, gaining 6.67% over the last week.

7. Meritage Homes: Engages in designing and building single-family attached and detached homes in the southern and western United States. Market cap of $860.04M. The stock is a short squeeze candidate, with a short float at 9.86% (equivalent to 5.77 days of average volume). The stock has had a good month, gaining 11.52%.

8. Ryland Group: Operates as a home building and mortgage-finance company in the United States. Market cap of $850.45M. Exhibiting strong upside momentum--currently trading 6.14% above its SMA20, 18.32% above its SMA50, and 31.57% above its SMA200. The stock has had a good month, gaining 19.76%.

9. KB Home (NYSE: KBH  ) : Operates as a homebuilding and financial services company in the United States. Market cap of $849.68M. Exhibiting strong upside momentum--currently trading 9.9% above its SMA20, 23.11% above its SMA50, and 15.64% above its SMA200. The stock has had a good month, gaining 39.45%.

10. Standard Pacific (NYSE: SPF  ) : Operates as a diversified builder of single-family attached and detached homes in the United States. Market cap of $778.0M. This is a risky stock that is significantly more volatile than the overall market (beta = 2.28). The stock is a short squeeze candidate, with a short float at 13.05% (equivalent to 11.75 days of average volume). The stock has had a good month, gaining 25.24%.

Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.


Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Data sourced from Finviz.

Motley Fool newsletter services have recommended buying shares of Meritage Homes. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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