Special Edition
>> welcome back to this special edition let’s talk about housing stocks. david, earlier in the program you mentioned something about valuations. most home builder stocks still trade in single price to earning ratios and in your view that’s still too much.
>> that’s right. this is a great example about why you have to analyze carefully and can’t look at just one metric. we think we’re in a housing bubble. the question is how long this lasts. and barbara’s point about how you can―this is a problem down the road but not short term is simply a―that could be true. however, we know the market anticipates the future several months out. we think housing is in a massive bubble that prices are going to decline at some point. there’s a massive amount of debt that’s being accumulated. the mortgage growth has been phenomenal, foreigners are having to buy all these securities, and john templeton has been on record saying that real estate prices can fall substantially.
>> you’re betting the housing stocks as a whole will decline?
>> and we’re not shorting them right now because we’re too nervous on the short-term basis as well, but we would certainly not be long.
>> every quarter these companies seem to blow away the earnings estimates by a quarter, 50 cents a share.
>> oh, there’s been incredible mortgage accommodation. as i mentioned earlier, the reckless financing that’s gone on is astounding to us. however, that is a greater fool theory game that can go on for a while.
>> it’s hard to say when things will change. certainly, things always change in the end, but the housing stocks are not the only ones that the market is giving a discount to because of the concern over the eventual rise in interest rates. as you say, the housing stocks continue to post very good earnings, trade in the single digits, but also --
>> are you buyers of the housing stock?
>> no, i’m not.
>> why not? they’re in the single digits, like you said, posting below earnings.
>> but as david just said, you look out over the next one, two, three years, so you’re not just buying a cheap stock. you’re saying to yourself when will earnings and cash flow improve? when will the luster come back to the company? and the housing stocks have definitely been very successful in the last one, two, three years, so i’m not investing in those right here. at some point when interest rates rise --
>> whenever that is. and housing has held on a lot longer than people thought it would.
>> i don’t necessarily think we have a big decline in real estate values coming ahead of us, but certainly the extreme, the doubling and tripling of business in the housing stocks makes me stay away right here. however, i would say there are other sectors that have had the multiple come pressed because the fears over rising interest rates and there are buyers in the financial group.
>> and we’ll find out what the buys are, barbara, after this short break.
>> ok.
