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Fed's QE Spillage: Home Prices Looks a Bit Toppy

By Alex Dumortier, CFA - Sep 24, 2013 at 10:15AM

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Home prices' largest increase in seven years.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

U.S. stocks opened essentially unchanged this morning: The S&P 500 (^GSPC -0.72%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI -0.50%) are down 0.28% and 0.2%, respectively, as of 10:10 a.m. EDT. The post-"no taper" euphoria has dissipated, leaving investors with substantial uncertainty regarding the course of monetary and fiscal policy -- remember the pesky matter of the federal budget and the debt ceiling, which still need to be dealt with by politicians, and in short order.

Speaking of shares that are sensitive to interest rates and the Fed's inevitable "tapering" of its monthly bond-buying program, today's focus is on housing and homebuilders, thanks to a flurry of price and earnings data.

One of the motives behind the Fed's asset purchases (a.k.a. "quantitative easing") is to spur asset price inflation, including that of homes. Indeed, by scooping up Treasury and mortgage bonds, the Fed is suppressing mortgage rates, such that buying a home becomes a more affordable, attractive proposition. (The 10-year Treasury bond yield, which is inversely related to the bond price, is the benchmark for mortgage rates.)

Although the month-to-month increase in the S&P/Case-Shiller Home Price Index for 20 metropolitan areas slowed in the July reading released this morning, the index rose 12.4% year on year -- the largest such increase in more than seven years. Prices advanced across all 20 cities on a non-seasonally-adjusted basis, led by eye-popping increases of 27.5% and 24.8% in Las Vegas and San Francisco, respectively. Perhaps this is the sort of thing legendary investor Carl Icahn meant when he told CNBC on Friday that real estate is "ridiculously overvalued," particularly in urban centers.

Because the S&P/Case-Shiller index is based on a three-month average, its July reading also reflects data from May and June, which means it overlaps heavily with the fiscal third quarters of homebuilders Lennar (LEN -2.11%) and KB Home (KBH -3.05%), which ended Aug. 30.

Sure enough, KB Home saw a 29% increase in revenue, which growth was broadly based, exceeding 25% in each of the company's homebuilding regions. The average selling price rose 22% year on year -- the 13th consecutive quarter of year-on-year growth. Meanwhile, Lennar put up a stunning 46% increase in revenue. Not surprisingly, both companies soundly beat Wall Street's expectations for EPS -- Lennar with EPS of $0.54 versus expectations of $0.45, and KB Home with $0.30 versus $0.23.

Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool has no position in any of the stocks mentioned. 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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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$33,980.72 (-0.50%) $-171.29
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,274.06 (-0.72%) $-31.14
Lennar Corporation Stock Quote
Lennar Corporation
$86.21 (-2.11%) $-1.86
KB Home Stock Quote
KB Home
$32.08 (-3.05%) $-1.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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