Housing Recovery In 2013?

Edgar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

U.S. markets are beginning to gain some traction at the beginning of October as strategists and fund managers are becoming less bearish.  As we are attempting to decouple from the European financial misery, one imperative sector that will catapult S&P to new highs is the housing sector.

In recent data, Census Bureau showed housing starts and permits rising significantly in August.  Per the National Association of Realtors, sales of previously occupied homes have actually climbed nearly 8% from a year ago.  This means that oversupply of homes are finally beginning to get absorbed by current buyers, which ties in closely with the rising permits data.  Builders have begun with an annual rate of 750,000 homes this year, which is up almost 30% from previous year.  As a matter of fact, home builders are so bullish that they have forecasted to keep building a steady flow of 803,000 new homes every year going forward. 

Since more residents have decided to rent rather than own throughout the recession period, giving a steady rise to multi-family dwellings, I try to separate homebuilders that construct single family homes and find undervalued opportunities in them before the market fairly prices the equities.  Some of the following names have been discounted in the past years and should climb steadily as more positive data from housing begins to enter the veins of NYSE. Fund managers have already been accumulating the following stocks in the chart below, each of which has been showing higher than average volume activity in recent days. 

<img src="/media/images/user_5086/home-builders-5-day-chart_large.JPG" />

The ETF SPDR S&P Homebuilders has steadily risen 4.11% in the last week.  KB Homes (NYSE: KBH) increased nearly 5%, with an above-average volume of 9.3 million shares.  The widely-recognized builder has recently declared dividends of $0.025 per share and yields 0.63%. 

KB Homes constructs and sells homes to its operating divisions across nine states and thirty distinct markets in U.S.  It also provides title insurance services to home buyers and mortgage banking services through KBA LLC, a joint venture with a subsidiary of Bank of America.   With introduction of new smaller homes, KBH will begin to see new orders and an improved buyer confidence stemming from low rates all throughout 2013. 

D.R. Horton (NYSE: DHI) has also had above average volume in the past few days, after reporting the highest earnings in five years of $76.1 million for the last quarter.  This $7 billion Texas builder constructs houses in 25 states and 72 metropolitan markets in U.S.  The majority of its revenue is derived from homebuilding operations with a lesser amount derived from land sales. 

At $22, D.R. Horton seems to be lightly discounted, even after rising 150% in the last twelve months. D.R. Horton has a solid management team that focuses on reducing debt, maintaining stern cost controls and increasing free cash flow.  While it is poised to benefit from higher margins than its peers in 2013, for the current year the company is expected to bring in $2.77 in earnings per share.

In a recent article by BusinessWeek, a headline named "Ready Or Not, Builders Are Back" highlighted the largest luxury homebuilder Toll Brothers' (NYSE: TOL) plan to build nearly 1,780 houses in a 387 acre undeveloped lot in Santa Ana.  The company has a slightly different niche than its competitors, as it caters more to luxurious residential communities through building and designing single family detached homes.  In addition, the company develops, owns, and operates golf courses as well as country clubs. 

This Pennsylvanian builder had also risen 150% in the last year, but had seen its peak of $37 in September.  It currently operates with a net profit margin of 2.7% and a return on equity of 1.55%.  Although these figures are not as impressive, the builder is expected to have an 8% revenue growth in 2013, with an estimated 3,000 home deliveries at an average price of $500,000 a unit.  Despite its rosy prospects for 2013, especially with the aforementioned Santa Ana new homes project completion, I still think TOL is fairly priced at these levels. 

After completing its offering of 1.875% convertible senior notes, investors cheered Meritage Homes (NYSE: MTH) and its strong stock growth, which started Tuesday.  Meritage does a little bit of everything; it builds a variety of homes that are designed to appeal to a range of homebuyers, including first time, move-up, active adult living and luxurious units.  Last year it closed on 3,268 homes and bought nearly 4,500 lots. 

With $333 million in cash, Meritage can weather the storm for the next twelve months and will be able to meet its working capital, capital expenditures, and its short term debt obligations.  Its backlog value has also improved from $249 million in 2011 to $458 million currently.  Net orders are expected to rise even further in 2013 after rising 49% in the second quarter of this year.  Although expectations are high for the October 25th 3rd quarter release, I believe the stock is currently overvalued by 5%-10%. 

Conclusion

While there has been some momentum in the housing industry, the overall fundamental outlook still remains worrisome for the next 12 months, as foreclosure activity is expected to trickle into 2013.  This will continue to put downward pressure on housing, causing weakness in home prices and stalling improvement in new single family home sales.  The housing market will improve significantly next year as existing home inventories have already come down from 10-12 months in 2010 to currently slightly below 7 months. However, the uncertain job markets and poor credit still sustains a less than favorable view of home ownership. 

 


edgarambart30 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.

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