Tuesday, January 19, 1999

"At present, the median sales price for a new home is $150,000. The S&P 500 is currently selling at 1,163.63 (November 30). Thus, today it takes 129 S&P 500 units to buy a new house ($150,000/1163.63)."

So wrote institutional portfolio strategist Steven Leuthold in his December research report to clients. He further said that "either the S&P 500 is radically overvalued, or home prices are radically undervalued, the best values in 35 years."

Just as some of my columns in recent years have shown that the "exchange rate" of stocks for existing homes was at near record levels, Mr. Leuthold has demonstrated the same with prices for new homes. The difference is that Mr. Leuthold didn't just pick spot prices to show a trend. Instead, he examined the data in every quarter since 1964 and laid all the data points out in a histogram that showed when stocks bought the least in new homes and when they bought the most.

The result?

The last quarter of 1998 established a new record.

In this entire period— nearly 36 years— the median figure was 336 units of S&P 500 to purchase a new house. Stocks were cheapest in the second quarter of 1979 when it took 625 units of S&P 500 to buy a new house. Back then, high interest rates and oil prices had cratered stock prices but there was a speculative rush into houses as millions of families squeezed everything to buy a house before the prices roses still higher. Now we are experiencing nearly the opposite— a speculative rush into stocks, trying to acquire them before prices rise still higher.

Since Mr. Leutholds report, stock prices have risen still more. Yet another new record is coming in the first quarter of 1999.

And that brings some uncomfortable questions to mind. When does something go from being a record high, a "radical high", to being absurdly high?

We can get some idea by looking at the historical figures. Do you remember the go-go years of the late sixties? The 'Nifty 50' years of the early seventies?

I do.

In both periods there was a hot new issue market. In both periods valuations on common stocks were at record levels. In both periods, brokerage house stock analysts found new ways to justify stock valuations of 50, 60, and 70 times earnings. The qualification for such a multiple: the stock in question was considered a "growth" stock.

And guess what? In the heady year of 1972 you could buy a new house with 250 to 260 units of S&P 500. That's twice as much as the current level. In the hot market of 1965 stocks were still better, needing only 230 to 240 units of S&P 500 to buy a new house.

What does all this mean for you and me?

Not much, in a way. Most of us buy our houses with paychecks. We do it slowly, over all the years of a mortgage. Only the executive and optioned few peel off shares and exchange them for houses. Usually very large houses the kind with indoor tennis courts, poolside cabanas, five car garages, and other doodads.

As long as this lasts, we will be in a new Taj Mahal era of housing, a kind of nationwide Newport as gigantic houses sprout around the country to express the new wealth that is being created.

Someday those houses will sell for less. But, again, it won't mean much to you and me.

What will mean much?

The exchange rate for stocks versus your mortgage has never been better. Sell a few highly appreciated shares of this or that, pay the modest capital gains tax, and watch your mortgage melt away. If a new house can be purchased with fewer shares of S&P 500 than at any time in the last 34 years, the mortgage on a new or existing home can be paid off with the sale of fewer shares of S&P 500 as well.

No Taj Mahal, perhaps, but no monthly mortgage payment, either.