Betting on the House
Sam Lieber's affinity for homebuilders propels his real estate fund to the top of the charts.
By Manuel Schiffres, Executive Editor
From Kiplinger's Personal Finance magazine, August 2005
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How vulnerable are housing prices to rising interest rates? If mortgage rates rise one percentage point over the next year, that's not significant. If rates rise two to 2.5 percentage points in a six-month period, we've got problems. But if they rise two to 2.5 points over three years, it will presumably be because the economy is strong, and that means incomes will grow and people will be able to make higher payments.
Do you see danger in any other real estate sectors? There is a lot of speculation in condos. The problem is that the units tend to be chockablock; they're very similar, which makes them almost like commodities. And in any business, if you sell a commodity, you're more vulnerable to competition.
You've made a bundle by betting big on homebuilders. Are you still bullish on the group? You bet. We have 53% of the fund's assets in the group. Our stake has been as high as 65% and as low as 40% over the past 18 months.
Is this based on a stock-by-stock analysis of all real estate companies or on your view of the big picture? Because real estate is so dependent on economic activity to create demand, I try to assess the state of the economy. Currently, we're in a low-growth economy with relatively modest inflation. Then I look at the supply-and-demand characteristics for real estate. I look at demographics, where there's business activity, where the jobs are being created. Then I look at the real estate supply-and-demand picture, which sectors look best, which markets look best -- and then I look at the best companies in the best sectors and markets.
That's a lot of looking. And you conclude? I conclude that demand for housing will remain relatively strong over the next three years and that publicly traded housing companies will continue to benefit from operating efficiencies that have allowed them to increase their market share by 10% per year, on average, over the past 12 years. Finally, housing stocks trade at historically low price-earnings ratios.
How many publicly traded homebuilders are there? There are 22, and Alpine owns 15 of them.
Stocks in this sector have had a huge run since early 2000. Aren't you worried that they've gotten pricey? Keep in mind that this group was extremely out of favor in 1998 and 1999. In early 2000, the stocks, on average, traded at 4.5 times earnings. Historically, the market has viewed the homebuilding industry as deeply cyclical.
When homebuilders are perceived to be at the peak of their cycle and earnings are soaring, the stocks trade at single-digit P/Es and that's when investors normally sell them. My assumption was that although the stocks were selling for 4.5 times earnings, the industry was still doing well, better than people realized. Companies' balance sheets had gotten better, they were changing their business models -- becoming, for example, more regional or even national -- and their founding fathers had brought in better managers.