Many people may not appreciate how powerful the economic fundamentals are for homebuilders in general, and for Pulte Homes, in particular.
First, the price of a Pulte share today is $40.5 per share. The estimated 2005 earnings are $5.4 per share. Therefore, an investor purchasing 1 share earns an implied yield of 5.4/40.5 = 13.3%. That's a pretty big yield, which far exceeds inflation of 2%, or 10-year Treasury returns of 4.5%.
Next, the earnings are growing at a rate of 48% per year. Growth can't suddenly cease, because Pulte has a 9-month backlog, and new orders are piling up faster than the homes can be constructed. Even if growth did come to a complete halt, investors would still be earning a yield of 13.3% annually.
Next, Pulte has huge margins, greater than almost any other business in the world. For example, in a $500,000 home, in the Chicago suburbs, there is a $95,000 surcharge for a premium "view", of a golf course! The view costs Pulte nothing, but is sold at a rate of $95K per housing unit! What kind of profit margin is this?
Pulte's land cost is rock-bottom, compared with most home-builders. For example, the third quarter earnings release listed 9-month revenues of $9.7 billion, against a land cost of $98 million, or about 1% of revenues. Compare this with the typical Chicago homeowner, who builds a $200,000 house on a $50,000 lot, so that cost of land is 25% of sale price. Think about the cost of land in your own neighborhood....
I have done a decent amount of ground-level investigation, including interviewing a builder about his profit margins, and investigating a Pulte community in my neighborhood. It's pretty clear that builders are making a lot of profit in Chicago, but Pulte far surpasses the typical homebuilder. The main advantage Pulte has is low cost of land procurement, and ability to get subdivision development approved by regional planning authorities in a speedy fashion.
On cursory inspection, Pulte shares resemble a bond earning 13.3% annually. Actually, they're much more valuable than a bond, because of the 360,000 lots owned and controlled by Pulte. A $60,000 investment in Pulte shares earns $8,000 annually in earnings, and controls 1 building lot by option, and owns 1 building lot outright.
A Pulte share is like a 13% bond, with a fast-growing coupon, and an equity kicker.
We now have a chairman of the Federal Reserve who believes he should target 1%-2% inflation per year. How will inflation affect home prices, and Pulte's 360,000 building lots?
There are some truth. 1) US population always increase, does not translate the price increase, For instance, in OHIO, Indiana, the price of house been going down even the poplulation increase in these area. Remember, during the internet bubble, Tele communication companies made lots of money, what happen now?
2) Housing price can go up only when income keep up, the real income is going down over last couple of years, the only reason the housing price going up because mortage companies issued loan lots of money to people that not suppose to take these loan. We have interest only, 1% loan for the first year, that can not go forever. Realistically, how many people can afford 500,000 house. In our area, you need to pay close to $6,000 just for property tax alone. So you can pay interest only, but you can not get away the property tax payment. Some one would pay 90,000 premier for golfer view, how many people could afford that way.
3) I owned two small apartment in midwest, in my area the housing market been going up 10% every year over last couple of years, yet the rent was actally going a little down over last three years even my cost went up(Insurance, maintenance), I sold one apartment earlier this year to someone who would convert the building into condo. Something have to give in a long long, either the rent will go up or the housing price will go down. If you can rent a two bedroom apartment for $800, the same condo would cost at least 180K, so the interest payment itself would be 900/Month, plus association fee and property tax, it would cost you at least 1200/Month.