PulteGroup, Inc. (PHM), Toll Brothers Inc (TOL): The New Housing Bubble Illusion

Home prices are once again shooting through the roof. Does this mean we’re in the early stages of yet another housing bubble? In a word, no.

Housing prices are rocketing higher
Data released this week by Standard & Poor’s showed that prices in 20 of the nation’s largest metropolitan areas increased by 12% in June compared to the same month last year. For the record, it was the third consecutive month of double-digit year-over-year gains.

At first glance, you’d be excused for concluding that this trend must be the harbinger of yet another housing bubble. Indeed, the last time home prices increased in consecutive months by an analogous margin was the period between August 2002 and May 2006. That is, just as the previous housing bubble was inflating.

“The average rate at which median new home sale prices in the United States has been escalating is over 17% faster than the average rate at which median new home sale prices rose during the initial inflation phase of the first U.S. housing bubble,” a blogger at Seeking Alpha warned in an article about the “second U.S. housing bubble.”

But while this sounds ominous, the reality is that it’s also incorrect. As R.D. Trinidad, president of Hoff & Leigh, a commercial real estate broker based in Colorado Springs, CO told me: “I think a near-term bubble is over-hyped.”

The difference between today and the last bubble
Again, to be clear, home prices are indeed rising at a rapid clip and, as Trinidad pointed out, “the residential housing market moves in cycles, alternating between periods of boom and bust. It very rarely remains at a stable equilibrium.”

But prices are shooting higher for a far different reason than they did in the period between 2002 and 2006. That is, supply in both the new and existing home markets remains exceptionally low. The inventory of new homes for sale equates to only a 3.9-month supply. This is the lowest level in nearly a decade. And the inventory of existing homes, although higher, is in the same boat, equating to a 5.2-month supply.

So, why is supply so low?

In the new-home market, it’s because homebuilders such as PulteGroup, Inc. (NYSE:PHM) and Toll Brothers Inc (NYSE:TOL) are still in the early stages of ramping construction back up since the bubble burst six years ago. In 2005, Toll Brothers Inc (NYSE:TOL), the nation’s largest luxury homebuilder, was selling 2,800 homes a quarter. Today, it’s selling less than 900 over the same span. And the picture is virtually identical at PulteGroup, Inc. (NYSE:PHM), where current production is at less than a third of its former high.

As my colleague Morgan Housel has pointed out, part of the problem here relates surprisingly to a labor shortage in the construction industry — I say “surprisingly” given the still-elevated unemployment rate. “They can’t find enough people to work in housing, that’s the only thing holding it back right now,” said hedge fund billionaire David Tepper at the time.