As enthusiasm for a U.S. recovery builds and market watchers predict double-digit equity gains for 2011, the U.S. housing market plods along the bottom, resolutely failing to produce any compelling evidence of a rebound.
It's a positively fascinating situation, provided you aren't an American homeowner. And it would seem to give Canadian vulture investors an opportunity, as there are a dozen publicly traded U.S. home builders who were crushed by the bust.
The problem with this investment theory: It's difficult to put in place, and likely unwise to do so.
One issue is valuation. The beaten-down home builder stocks have already been speculative fodder: Some doubled and tripled in 2009, with others jumping 50 per cent or more. Nearly all built on those gains in 2010. The result: The average gain for a home building stock from the end of 2008 to today is roughly 67 per cent.
Another problem, which should go without saying to the sophisticated investor: The stocks in this sector don't move uniformly, thanks to the usual suspects of operational performance and balance sheet health, as well as the choices each company has made as to where to operate. Certain companies have been far more exposed to the overblown and overbuilt markets of Florida and the American Southwest.
This year's returns in the sector range from a 27-per-cent drop at PulteGroup - where losses are widening, not narrowing - to a 44-per-cent gain at Lennar Corp. which returned to profitability this year.
Rather than try to assess the prospects for multiple U.S. metro real estate markets, a Canadian investor might just try to buy in to U.S. home building by choosing one of several exchange-traded funds. Herein lies the least-known of the problems: Home builder ETFs don't actually provide enough exposure to U.S. home builders.
Let's take three major ones as examples.
The iShares Dow Jones U.S. Home Construction Index Fund puts just two-thirds of its money into what it calls "home construction," with the rest spread among building materials, home improvement retailers and sellers of furnishings. Home Depot Inc. and Lowe's Cos. Inc. are among its top 11 holdings.
The SPDR S&P Homebuilders ETF has less than one-third of its money in home builders; building products companies make up nearly as much of the portfolio. Only half of the top 10 holdings are home builders.
And the PowerShares Dynamic Building & Construction Portfolio fund, often lumped in with home builder ETFs, owns just two home builder stocks, making up 10 per cent of the portfolio. Industrials make up more than 60 per cent of the fund.
This issue - there are plenty of non-home-builder stocks driving performance at these ETFs - has actually benefited the funds' owners this year. In the fourth quarter, the iShares fund is up around 9 per cent, with the SPDR above 11 per cent and the PowerShares topping 14 per cent. The average home builder gain in the quarter is about 8 per cent.
The PowerShares fund was helped in the quarter by double-digit gains from Home Depot and Lowe's, as well as a 30-per-cent gain from Fluor Corp., which is an industrial construction company with little involvement in residential building.
All of this means there's no easy way for Canadians to buy in to the U.S. home building sector in anticipation of its recovery. Yet that raises a larger question: Is there even a rebound coming any time soon?
Economists Vernon Smith and Steven Gjerstad of California's Chapman University are among those who believe U.S. housing is in for a long, hard slog. They point out the typical level of annualized new-home sales has been about 700,000 to 800,000 units, compared with the current rate of about 275,000 units. With two million houses either on bank balance sheets or predicted to be headed there, it would take five years to absorb the inventory under normal economic conditions. High unemployment and consumer debt may make the time frame eight to 10 years, instead.
That suggests an extended period where home builders have a rough time selling their products. And a period when investors in home building stocks wait, and wait, for their gains.