The US housing market seems to be getting stronger.
New home sales are rising at a fast pace. Prices are also increasing to record levels.
The construction sector is slowly recovering. We are seeing a growing need for construction materials such as brick and lumber.
Some construction companies are already seeing their stock price rising.
One of those companies is Boral Limited [ASX:BLD].
Boral is an Australian Company with close ties to the US. They provide clay bricks, concrete and roof tiles for residential and mid-rise commercial buildings.
In 2015, Boral USA had a profit for the first time since 2007. The company believes this change is due to the recovery of the US housing market.
From September 2011 to May 2016 Boral’s stock increased 97%.
That’s great news for shareholders. But just based on Boral’s success, can we confirm that the US housing market is getting stronger?
To answer that question, let’s look at a different company.
Portland Cement is a Spanish company. It’s one of the largest cement producers in the country.
Between January 2005 and March 2007 their stock price had a 136% increase.
Looking at this company, we could assume that Spain’s housing market was booming during that period…and it was.
From 1996 to 2007 construction in Spain grew 5% per year.
Only to crash by 2008. In case you don’t remember, this is what happened.
Spain’s housing bubble started in 1997.
Housing was growing six times quicker than average salaries. Credit flowed freely. The media urged people to buy property before the next price increase.
In 2000, credit became cheaper. Interest rates lowered. Mortgages got longer. Developers could now afford to buy more land and build more houses.
Every year, the construction of 600,000 new properties were started. In 2005, the construction sector went even crazier. Over 800,000 houses were started…more than Germany, France and the UK put together!
Corruption ran rife. Politicians made millions changing land classification from rural to urban. This made land more expensive.
Spain’s ‘economic miracle’ ended in 2008.
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Unsustainable property price increases and a rise in unemployment combined with the Spanish Central Bank’s regulatory failure contributed to the collapse of the construction market.
Let’s look at Boral once more. But this time, let’s look at the 10 year history.
Boral’s stock price increased steadily from August 2006 to June 2007…only to drop to record lows in 2009 during the Global Financial Crisis.
Government and central bank stimulus, like the recent decreases in interest rates and banks loosening lending, are helping prop up housing markets all over the world. That’s very much the case here in Australia. These factors alone could be causing Boral’s latest stock price rise.
All their stock price rise is telling you is that company’s earnings are increasing. It doesn’t guarantee that all is well in the US housing market…or Australia’s for that matter.
Of course, Boral may continue to see healthy gains for years to come…or not.
But one thing is clear. The housing market is looking more like a house of cards than one of bricks and mortar. I don’t know when that big gust of wind is coming. But when it does, Australia’s own ‘economic miracle’ story may look uncomfortably similar to Spain’s.