Has the Housing Recovery Arrived?
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Good News
On October 17, the US Department of Commerce reported that US housing starts had rallied to a 4 year high, higher than in July 2008, to reach an 872,000 annual rate. This was way higher than what was expected by economists, who had predicted that it would be around 770,000, with the more bullish economists calling for 800,000. This was bolstered by strong building permits which pointed towards the possibility of a housing recovery. Record low mortgage rates have helped move the housing markets along, with rates at their lowest levels since 1971 (when mortgage rate tracking started). Home builders like Toll Brothers (NYSE: TOL) and D.R. Horton (NYSE: DHI) rallied on this news. More good news came out on October 19, when US existing home sales rose 11% year over year to a 4.75 million rate (but was down from the 4.83 million in August), and prices were up 11.3% year over year. The supply of existing homes fell by 3.3% to 2.32 million, which helped push prices higher.
Big Ben’s Big Bang
As we all know Ben Bernanke engaged in another round of quantitative easing. This time the Federal Reserve is going to buy up $40 billion in mortgage backed securities each month until December, when they will consider what to do next. Most assume that QE 3, or QE Infinity, will continue throughout 2013 in a larger manner than the current $40 billion. The justification behind this is that it will help stimulate the housing market through cheaper mortgage loans and lower refinance rates. So far, rates have come down considerably. Before the announcement of QE 3, 30 year fixed mortgage rates were around 3.5-3.6%, but Freddie Mac's latest mortgage rate report on Thursday said that the average 30 year fixed mortgage was 3.37%. That was down from 3.39% a week ago, and 1 basis point above the all-time low of 3.36% set 2 weeks ago. Mortgage rates look like they are coming down even further (which surprises me, with the law of diminishing returns and such), and this seems to be helping the housing market. 15 year fixed mortgages hit 2.66%, a record low, and were down from 2.7% last week. If this trend continues, which I think it will, mortgage rates will go at least a little bit lower, further pushing the housing market along, and might give the push the housing market needs to get back on track.
Ways to Play
Signs are pointing towards a recovery in the housing market, which bullish catalysts in the future to support this trend; like the extension of QE which will lead to lower mortgage rates and strong building permit levels. But how can investors benefit from this. Two homebuilders you could look at are the ones I stated above, D.R. Horton and Toll Brothers. Toll Brothers makes luxury, higher end homes, so it caters to the upper end of the income bracket. D.R. Horton is another home maker, but this company caters to all markets, not just the luxury market. Personally, I think the ETF SPDR S&P Homebuilders (NYSEMKT: XHB) is the best way to go. It is a great way to benefit from a rebound in the housing market without so much company specific risk. It pays out a .9% dividend as well, which isn't amazing, but cash is cash, and that is bigger than the .7% D.R. Horton pays out and the 0% Toll Brothers pays.
XHB invests in all types of homebuilders, and can still provide you with great returns. YTD XHB is up 53%, so you can still get the types of gains you would from individual housing stocks (both TOL and DHI are up 70% YTD), but with capped risk. A more interesting way to play this is with Waste Management (NYSE: WM), which disposes waste from construction sites. WM makes a lot of money from construction, as it is needed to both drop off large garbage bins at the sites, and to haul that garbage away and dispose of it. Joe Magyer from the Motley Fool podcast brought this to my attention, so I decided to look more into it. It turns out that the waste levels from construction sites can be as high as 10-15% of the total materials used (which is higher than the 2.5-5% estimated by the industry). All that waste has to go somewhere, and WM has plenty of landfills to do the job. Plus, WM can make money from recycling the waste, such as valuable copper, steel, and wood. The more construction that goes on, the more money WM can make. It also pays out a 4.35% dividend yield, which is very appealing.
Final Thoughts
Recent economic data points towards a housing recovery, and the forward looking indicators and catalysts are also very promising. If you are bullish on the housing sector but don't know which stock to pick, go with the ETF XHB. Waste Management is an interesting play on the housing recovery, and is an overall well rounded stock as well and worth taking a lot at. I think that we have seen the housing market bottom out, and that the housing market will final start contributing to economic growth in the months/years to come once again. Let's hope a strong recovery is on its way.
callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of Waste Management. Motley Fool newsletter services recommend Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
