Horsham, PA, June 9--Homebuilder stocks have been on a tear, with housing and real estate prices soaring in many parts of the country, but Joel Rassman doesn't think the industry faces a speculative bubble.
Many analysts think higher interest rates and a slowing job market may bring an abrupt end to the celebration, which could mean trouble for many industries and the U.S. economy in general.
Yet the chief financial officer at Horsham, Pa.-based Toll Brothers Inc. says supply and demand issues in fact promise more growth for homebuilders.
Rassman talked recently with MarketWatch about the homebuilding sector and his outlook for Toll Brothers.
Q. What's your long-term outlook on the homebuilder sector?
We've seen consistent growth in the price of homes and the profitability of the public homebuilding companies. This isn't surprising when you have a shortage in a market. If you have fewer houses than people who need them, then prices will rise until you get equilibrium. We have not yet seen that equilibrium, so house prices continue to rise.
As an industry, housing actually hasn't really grown in the past 50 years. In the 1950s and 1960s the industry did about 2 million new housing units a year, in the 1970s it was 1.8 million, a bit less in the 1980s and 1990s. Now it's back around 1.8 million annually again so far this decade.
Despite the fact that the U.S. population has grown by 40 million families since the 1970s, we're still producing about the same number of homes.
But that's not the whole story. Of the roughly 1.8 million homes the industry now produces a year -- about 300,000 to 400,000 are second homes, which is much more than in the 1970s.
So as a country we produce significantly less primary homes even though we've had all this population growth, mostly as a result of regulation. So there's a supply and demand imbalance.
Q. What do you make of reports of widespread speculation in the hottest markets like Florida, Nevada and California?
You have to look at the entire country in terms of the impact of any speculation that may exist. But it's clear that in some markets the prices of homes are being pushed higher by some degree of speculation. Some housing markets have prices increasing faster than should be maintained.
"The real concern is people who are in the market looking to simply 'flip' the home in the short term."
But recently in the Las Vegas market we saw lots of speculators withdrawing due to the efforts of builders limiting their ability to buy. And a lot of speculators weren't seeing the profits they expected.
Now prices are going up at a slower pace in Las Vegas, which is good. You can't keep the torrent pace in hot markets -- it's unhealthy.
There are also different kinds of speculators. Some people look to buy houses as an investment and rent them out, and also get the reward of price appreciation. That's not necessarily a bad thing because they're providing a needed service to renters or people who can't afford to make a down payment on a home.
The real concern is people who are in the market looking to simply "flip" the home in the short term. As a subset of the general housing market, the big public homebuilders have put into place anti-speculative language and clauses in the areas where there are problems to cut down on speculative activity. Some speculators may get through, but the vast majority is turned away by the anti-speculation clauses
Q. Is there a housing bubble?
I don't think so. If we see an adjustment caused by something we don't envision, it's likely to be similar to the situation in the San Francisco market caused by a loss in jobs when the dot-com bubble burst. There was a rollback in home prices for a year, but then the market came back even though the jobs didn't return.
