- House flipping, back in vogue…
- Believe it or not, the best is yet to come for homebuilders: Here’s why
- G-20 leaders’ very precise economic target — which Japan just blew up
- One commodity that’s actually up in recent weeks
- Readers crash The 5’s inbox with golden Putin caption-contest entries
The couple was in their early 30s, both real estate agents. They’d taken up house flipping, seeing as it was more lucrative than showings and closings.
One property needed what they thought was about $30,000 of work. It turned out to be $72,000. They cleaned out their savings, maxed out their credit cards and borrowed the rest from their parents to make it all work.
Note well: This is not a story from 2006. And the 72 large in renovations actually paid off.
The couple is Tarek and Christina El Moussa of suburban Los Angeles — the stars of Flip or Flop on HGTV. If you’re not plugged into basic cable, yes, this sort of thing still has an audience after the housing debacle that contributed so much to the “Great Recession.”
And done right, flipping is once again a lucrative thing — even when the renovations cost more than twice the amount budgeted. “The uninitiated viewer might think that sort of unplanned cost would blow up any chances of making a profit on the flips,” says our small-cap specialist Jonas Elmerraji.
“But in the red-hot real estate market that is Los Angeles today, it really doesn’t matter much. For investors with the capital to buy a midpriced home and invest in upgrades, it’s been hard to lose money lately.
“According to data from RealtyTrac, home flippers started off 2014 with average returns of 30% nationwide. In hot markets like Memphis and Seattle, the flippers are getting returns as high as 56% and 48%, respectively. Put simply, there’s a lot of money on the table right now.”
And you can grab a share — no haggling with buyers or contractors required.
“The housing market is on fire as we head into 2015,” says Jonas, with further background.
Yeah, we know. The financial rot that led to the Panic of 2008 hasn’t been cleaned out. We get it. But understand, dear reader, we fix our gaze on the markets as they are, not as we might wish them to be. Heh…
“We’re in a very different environment today than we were when the housing market peaked back in 2006,” says Jonas. “One of the biggest factors is interest rates. That’s because interest rates are still near zero today — part of the extended hangover from the last housing crash Those low interest rates have a huge effect on how affordable a mortgage is today.
“Then there are the demographics to think about. Millennials, the generation born between the early 1980s and the early 2000s, are getting older — in fact, the oldest of the group are in their mid-30s. This is a big group we’re talking about: There are an estimated 95 million millennials in the U.S.”
Heck, some of them have even paid off their student debts and are ready to move out of Mom’s basement. “With the costs of rentals rising just as quickly in the largest 20 metro markets,” says Jonas, “more millennial-age workers are thinking about making the jump to ownership than ever before.
“After forced deleveraging in the wake of the financial crisis in 2008, homebuilders were left in an interesting situation,” Jonas goes on.
“Coming out of the Great Recession, the homebuilders had huge land holdings and new home inventory that was recorded on corporate balance sheets at a discount, yet no one would touch them.”
They’ve still not fully recovered from the bursting of the housing bubble. And new home sales remain well below the historical average, even after you throw out the lunacy of 2004-07.
“But this chart of new home sales doesn’t tell the whole story,” Jonas explains. “That’s because sales volumes are only part of the equation for homebuilder profits — the other part comes from the prices of those homes.”
More expensive homes mean more profits for homebuilders: “When you buy new construction for, say, $450,000 or more, you expect higher-end finishes — the optional upgrades like granite and wood floors that pad builders’ margins. And that’s the exact direction that builders have been moving in. Today, the average price of a newly built home sits at $277,000 — that’s a full $20,000 more than new home prices before the housing bubble burst.”
Jonas has spied a guppy swimming among the big homebuilder fish like Lennar and Pulte. It’s competing in some of the fastest-growing housing markets. Average price: $422,700. Definitely higher end. But it trades at a 40% discount to its peers. “That means shares would need to rally 70% just for this stock to trade in line with the rest of the homebuilding sector.”
We’re withholding the name and ticker symbol out of respect for Jonas’ paying subscribers. But it’s easy to become one of them: Click here for access.
Major U.S. stock indexes are in the red this morning, but not by much. As we write, the Dow and the S&P 500 are holding up better than the Nasdaq and the Russell 2000. The S&P has shed three points, to 2,037.
Traders are navigating a series of crosscurrents today, to wit…
- Economic numbers that disappointed. Industrial production edged down 0.1% in October; the “expert consensus” of Wall Street economists had guessed a 0.2% increase. But the Federal Reserve’s Empire State manufacturing survey shows modest growth accelerating so far in November…
- Merger-and-acquisition activity: Botox-maker Allergan has agreed to a buyout by Actavis. That would foil a takeover attempt by Valeant Pharmaceuticals in conjunction with hedge fund guy Bill Ackman. Meanwhile in the energy patch, one of the “Big Three” oil services players, Halliburton, is taking over another, Baker Hughes. Both are longtime holdings in the Outstanding Investments portfolio
- Japan has stumbled back into recession. Well, if you use the “classic” definition of a recession as two straight quarters of negative GDP. This too surprised the experts… for reasons we can’t fathom: Japan raised the national sales tax from 5% to 8% in April. How could that not prove an economic drag?
The shrinkage in the Japanese economy will make the G-20’s task that much harder: Leaders of the G-20 nations wrapped up a meeting in Brisbane, Australia, yesterday. Goaded on by their economic wizards, they set a collective goal of 2.1% economic growth by 2018.
Not 2.0%… or 2.5%… but 2.1%.
It’s at this moment we recall Agora Inc. founder Bill Bonner’s dictum: “In the hands of economists, the more precise the number, the bigger the lie.”
All’s quiet in the commodity complex. Gold is holding onto most of Friday’s gains at $1,185. Crude is slipping back toward $75.
Looking for a commodity that’s actually moving up in recent months? Try uranium…
Prices began to dive right after the Fukushima disaster in Japan in March 2011: “Prices fell, fell and fell some more,” says our resident rockhound Byron King, “bottoming out in the high $20s per pound last summer.”
Now it’s at $41 and change. So what’s happening?
“First, Japan is on track to restart many nuclear power plants over the next two years,” Byron explains. “You won’t see banner headlines about it; there’s too much political sensitivity in Japan, and elsewhere.
“Second, other nuclear-powered utilities across the world have begun requesting price quotes. Call it groupthink or whatever you like. Apparently, there’s a consensus across the nuclear power industry that days of super-low uranium prices are coming to an end; now it’s time to stock up and lock in prices.”
Recently, Byron sat in on an industry conference where one insider said his supply chain can’t deliver new uranium supplies for under $100 a pound. The current price? “Enjoy it while you can,” he said.
Looking for a way to play it? There’s always industry stalwart Cameco (CCJ). “Shares traded at $16.50 at the end of October,” says Byron. “They’re pushing $20 in mid-November, as I write, still far below five-year numbers.”
The 5’s readership has set an indoor record. We count roughly 150 replies to our caption contest on Friday, asking for your suggestions to sit beneath this oldie-but-goodie photo of Russian president Vladimir Putin…
No one asked, but in case you wondered, there are no prizes — just the satisfaction of a chuckle or three. Let’s go…
Several submitted, “The gloves are off.” Several more submitted something like, “They say, ‘He who has the gold makes the rules!’ and I plan to do just that!”
There were a few references to the gold-leasing schemes of central banks and commercial banks. Our favorite: “So this is the last gold brick the Americans held at their Fort Knox.”
Alternately: “I sure hope the Germans don’t find out this came to us out of Fort Knox.”
Or: “Well, I’ll be. You’re right, it says ‘U.S. Treasury’ right on top.”
A few referred to assorted cases of gold fraud that made headlines some years back: “So this is what gold-plated tungsten looks like!”
Or: “Damn!! The paint is still wet.”
“Hey, this isn’t a gold bar. It’s Swiss chocolate. Somebody’s stolen our stolen gold!”
Then there’s the greenback commentary: “Better than a fistful of dollars!!!”
Others: “This is American kryptonite!”
“Memo to the USA: I have taken my (golden) gloves off.”
“This seems like a very blunt weapon for use in our new ‘Colder War.’”
Best of the bunch: “So that’s what the new WMD (weapon of monetary destruction) looks like!”
And this, on the fate of the petrodollar system: “We are leaving the dictatorship of the market where oil goods are based on the dollar and will increase the possibilities of using [other] national currencies: the ruble and the yuan.”
Oh, wait: That’s an actual quotation from Putin on Friday during an interview with the state news agency Tass.
There were the workout references…
“…19, 20. (Whew.) No pain, no gain.”
“Thought I was ‘ripped’ riding horseback? They should see me when I curl gold ingots.”
“This gold kilo is what I lift to keep in shape. Obama lifts paper.”
Kudos to the reader who offered up an inside joke for The 5’s readership: “With this… I can crush a tapir!”
Random good ones…
“Khrushchev only had a shoe.” “This works better than a Kalashnikov.” “What if I had it all?”
Several entries invoked President Obama. The one we liked most also invoked Hamlet: “Alas, poor Barack.”
Another invoked Daffy Duck: “Mine, all mine.”
And Austin Powers: “Yessss. And Mike Myers thought HE had a big one.”
One prolific reader submitted five entries, all pretty good:
** “I’ll take this over Obama’s Nobel Prize any day.”
** “Greenspan said ‘measurably,’ didn’t he?”
** “That’s odd. This one has an old German refinery stamp.”
** “I like the silver ones too.”
** “It sure feels like more than just an asset.”
And finally, several readers made a borderline vulgar reference along the same line. Our favorite and the most subtle variation on the theme was: “I have the United States by its bars!”
Thanks to everyone for taking part in the merriment…
Best regards,
Dave Gonigam
The 5 Min. Forecast