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Hate Big Oil? Hate home-builders, too
Consumers are fuming over outsized oil company profits. But by the same logic, shouldn't home-builders and real-estate brokers be on the hot seat for soaring prices?
By Jon D. Markman
Americans outraged over the price of gasoline and the sensational profits of oil companies of late should stop a moment and look inward. Not at their souls, but at their homes -- which have appreciated in value at least as much as gasoline, and in many cases much more.
According to U.S. Census data, the price of the average home in Los Angeles is up 112% in the past five years, 106% in Miami and 91% in New York. Meanwhile, unleaded gasoline futures traded at the New York Mercantile Exchange are up only around 85%.
By the logic of consumers calling for the heads of oil company executives, home-builders and real estate brokers ought to be on the hot seat, too. The fact that all wrath is directed toward energy producers shows a bubbling hostility for the boom-and-bust dynamics of capitalism among those who feel left out of the rising tide of economic growth.
The anger also seems to show that energy investing has simply not caught the fancy of the public in the past couple of years in the way that technology investing did back in the 1990s. A lack of widespread jubilation over the terrific escalation in the price of oil company stocks -- as there has been over home prices -- shows that, as I suggested in my column two weeks ago, they probably have a lot farther to go.
Spectacular rewards for home-builders
Major companies in both industries have experienced rapid income and price gains of late, but the rewards for home-builders have been a lot more spectacular than for energy producers. Over the past year, the average earnings growth rate of the three largest oil companies in the world is 40%, and their stocks have advanced an average 22% this year. At the same time, the average earnings growth of the three largest U.S. home-builders is 44%, and their stocks are also up 22% on average.
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But longer term, the home-builders' advantage is striking. The stocks of the countrys two largest home-builders, Pulte Homes (PHM, news, msgs) and D.R. Horton (DHI, news, msgs) are up 580% and 460% over the past five years, respectively, while the shares of the two best-performing major international oil companies, Total (TOT, news, msgs) and BP (BP, news, msgs), are up 101% and 47%. Both groups, of course, have beaten the broad market, which has lost a fifth of its value since September 2000.
A question of perspective
So why is it that so many consumers and politicians are calling for an investigation of oil and gas companies "windfall" profits, and yet there has been nary a peep about the record-breaking profits produced in the last few years by home-builders?
It is a peculiarity of the way we experience the world through the exchange of money that one type of sharp price appreciation can appear wildly unfair, and another seem so reasonable. It seems the key difference here is that most middle-class Americans have a dog in the hunt when it comes to home prices. Homeowners like to see house values rise, and it makes them feel richer even if they never realize the gain. In contrast, few seem to own shares of oil companies, so theres nothing in the pump-price advance but pain.
There are striking parallels between the two advances that may make you feel better about the rise in oil prices, and might even make you a buck.
The main thing to understand about the energy and home-building industries is that they are both highly cyclical and capital intensive. This means that over the course of a decade they will have some very good years when supply is tight (and expected to be even tighter in the future) and some very bad years when supply is plentiful. Because neither industry knows exactly how long the good years will last, they each need to make as much money as they can during the boom years. And during the bust years, they both need to invest as much of their savings as possible in property and equipment to ensure that theyre in a position to compete when the next upswing arises.
Most home-builders are taking their enormous profits of late, and plowing them right back into their businesses by buying more land and bulldozers. They might buy smaller home-builders with rights to good land, or just buy more land themselves. By the same token, energy companies are taking their sizable profits and purchasing new oil and gas blocks from governments around the world, as well as new equipment to do the drilling.
The end of 'easy oil'
As petroleum becomes both harder to find and costlier to extract and transport, energy companies absolutely need the income that higher pump prices bring so that they have the incentive and funds to explore. Theres a real scarcity of prime oil and gas properties left in the world as the best OPEC, North Sea and U.S. fields reach their capacity peaks -- and the most promising new places to drill are in remote undersea, jungle or desert locations, where discovery costs are high and shipping is problematic. A Royal Dutch Shell executive is credited with the observation that "oil is seldom found where it is most needed, and seldom most needed where it is found."
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