Take a quick walk with me down Flashback Lane. The year is 2004. Homes, by most measures, are no longer affordable. Yet home prices did not peak until two years later in the early months of 2006.
The stock market, a forward-looking beast, tends to recognize bad (and good) trends roughly 6 months in advance. Not surprisingly, then, one of the premier home builders, Toll Brothers (TOL), catapulted roughly 200% from $20 per share to $60 per share between the start of the bubble in 2004 and mid-2005. Toll Brothers (TOL) then spent the next 6 months depreciating 50% in value as it dropped back down to $30 per share; it made it to $20 and below by the end of the real-estate collapse in late 2008.
Back in the present, homes are once again stretching the boundaries of affordability. With a little help from John Carney, CNBC, and the folks at the the St. Louis Federal Reserve bank, one can see that housing has crossed below its long-term trend on affordability for the first time since 2004. Does that mean homes will depreciate in value tomorrow? Not likely. Real estate didn’t hit its maximum price capacity until 2006 and the bubble didn’t really pop until 2007. Does this mean that home builder stocks are about to get crushed? Not necessarily. Toll Brothers (TOL) ran up 200% from the onset of a downtrend in affordability to 6 months prior to the peak in home prices.
Indeed, the SPDR S&P Homebuilder ETF (XHB) appears to have found solid support near its 200-day moving average. Moreover, there appears to have been an ample number of tests near $28 per share for XHB; in every instance, XHB has bounced higher.
Clearly, the U.S. Federal Reserve’s upcoming decision on the future of monetary policy (September 18) is crucial for stock investors. The recent upswing in funds like SPDR S&P Homebuilder ETF (XHB) and iShares DJ Home Construction (ITB), as well as a broader-based 7-day winning streak for the S&P 500, suggests that most expect the Fed to do little more than “save face” with a token amount of tapering; the Fed is still expected to provide as much bond-buying with electronically created dollars (a.k.a. quantitative easing) at the same rate as “QE2″ from 2010-11.
Next page: What if the Fed delays tapering?