5 Macro Reasons Why Homebuilding Stocks Are a Buy
Davison is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When analyzing a stock, it makes sense to start with a macro-level analysis. If you ignored macro-level trends when buying homebuilding stocks in 2007, you obviously would have gotten crushed (no matter how fundamentally sound the individual stock was). Unlike in 2007, however, the economic trends in the housing market are very strong. In fact, it would be hard to picture a better economic scenario for homebuilding companies. Here are five macro reasons why homebuilding stocks are a buy.
1. Mortgage rates
Mortgage rates continue to hit record lows. Rates for a 30-year fixed-rate mortgage are currently averaging 3.40%. In fact, all mortgage products, except the 5-year ARM, hit all-time lows last week. With the Federal Reserve’s commitment to purchase $40 billion in mortgage-backed securities a month for the foreseeable future, it seems unlikely that the downward trend will reverse any time soon.
2. Price to rent ratios
The price-to-rent ratio calculates whether it is more attractive for an individual to rent or to buy in a given area. Trulia.com found that in 98 out of 100 America’s largest metros, it’s currently cheaper to buy a home than to rent one. This should drive more individuals to homeownership in coming months.
Existing home inventories have been putting a downward pressure on new home sales. However, total US for-sale inventory for single family homes, condos, townhomes, and co-ops have been declining. In fact inventories decreased 18.7% year of year in August. Foreclosures are also declining.
4. Builder confidence
The National Association of Home Builders (NAHB) reported an increase in builder confidence for newly built, single-family homes for the fifth consecutive month in September. This brings the index to its highest point since June of 2006.
5. New home sales
New home sales have averaged 362,000 in 2012, a 20% increase from 2011. New home sales, though, are still at the third lowest level since 1963, the year the Census Bureau began tracking the data. So while there is a strong upward trend in the data, there is a lot of room for continued growth.
These 5 trends should provide a boon to homebuilding companies in the coming months. But should you invest in companies that specialize primarily in single-family or multi-family homes?
You can see from the charts above single-family home starts are further below their pre-crisis average than multi-family home starts (providing more room for growth in single-family homes). Here are a few companies that specialize in single-family homes that you should consider adding to your portfolio:
- M.D.C. Holdings, Inc. (NYSE: MDC): M.D.C. Holdings builds single-family detached homes in Arizona, California, Nevada, Washington, Colorado, Utah, Virginia, Maryland, Pennsylvania, Delaware, New Jersey, Florida and Illinois. MDC also has a financial services segment which originates mortgage loans, offers third-party insurance to homebuyers, and provides title agency services. Market cap: $1.85 billion.
- PulteGroup, Inc. (NYSE: PHM): PulteGoup builds single-family detached, townhouses, condominiums and duplexes. As of December 31, 2011 the company offered homes for sale in approximately 700 communities. PHM also offers mortgage banking and title services. Market cap: $5.95 billion.
- KB Home (NYSE: KBH): KB Home constructs and sells attached and detached single-family residential homes, townhomes, and condominiums. The company operates in California, Arizona, Nevada, Colorado, Texas, Florida, Maryland, North Carolina and Virginia. KB Home also provides title and insurance services to homebuyers. Market cap: $1.11 billion.
- Meritage Homes Corporation (NYSE: MTH): Meritage Home Corporation designs and builds single-family attached and detached homes. The company has operations in Arizona, Texas, California, Nevada, Colorado, Florida, and North Carolina. Market cap: $1.35 billion.
- Lennar Corporation (NYSE: LEN): Lennar Corporation builds and sells single-family attached and detached homes. As of November 30, 2011, the Company owned 94,684 homesites and had access through option contracts to an additional 16,702 homesites. The company provides mortgage financing, title insurance, and closing services for homebuyers. Lennar also invests in distressed real estate assets. Market cap: $6.58 billion.
One caveat to consider: each of these stocks is up substantially YTD. MDC is up 118.43%; PHM is up 145.64%; KBH is up 113.54%; MTH is up 63.99%; LEN is up 76.95%. While some of the data presented in this article is clearly already priced into these stocks, the direction and strength of these trends makes it difficult to pass on any of them.
davisonw has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Meritage Homes. 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.