Real Estate Magic
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In September, housing starts and building permits soared to their highest levels in four years. U.S. Housing Starts, which are a representation of homebuilder activity, rose 15% to 872,000 last month versus a more modest 4.1% increase in August. The jump was driven by increases in the residential building market. The number of U.S. Building Permits grew by 11.6% in September, in comparison with a decline of 1.2% in the previous month. Economic indicators are really beginning to support the recovery in housing.
Nonetheless, housing starts are far from "normal," as Hovnanian Enterprises (NYSE: HOV) CFO J. Larry Sorsby noted at a recent Deutsche Bank conference. They would have to return to levels of more than one million to be deemed average by industry standards. Nonetheless, the market is heading in the right direction considering the severity of the blow it took during the credit crisis.
Hovnanian's shares are presently trading at their 52-week high. Some investors are exclaiming that now is the time to sell homebuilder stocks because near-term growth will not be as robust as was hoped, according to MKM Partners (cited in Barron's). The article suggests that third-quarter earnings results will not sufficiently warrant current valuations in the group, which MKM Partners cites as about 1.9x adjusted book value, although for long-term investors valuations have the potential to be more reasonable.
In its favor, Hovnanian says, is its liquidity, which will fuel its acquisition of land at fire-sale prices as home values only begin to climb from their bottom. In its most recent fiscal 3Q, the New Jersey-based homebuilder increased revenues by some 35%, which is supporting Hovnanian on its path to reattaining profitability, as Sorsby described. The homebuilder's contract backlog increased by 41% in the period versus the same quarter a year ago, which is an indication of forthcoming home deliveries.
The anticipated climb in new homes and a slow-but-sure increase in home values has real estate professionals busier today than they once were. As pointed out by a recent article in the Wall Street Journal, the most recent housing data is a bullish sign for companies like Zillow (NASDAQ: Z) and Trulia, both of which provide information on the real estate market online. As real estate sales professionals get busier and earn more money, they are going to have more cash to reinvest into their businesses for activities such as marketing.
Marketing is a key component in a real estate salesperson's business. They are in such a fiercely competitive field that they need to find a way to differentiate themselves from other brokers and to connect with home buyers and sellers in the most effective way possible. Increasingly, however, realtors are expected to turn to technology and the online marketplace to companies that fulfill their marketing needs. Zillow, which is an ad-driven business, is in an attractive spot to steal market share from some of its more traditional advertising rivals. Since their IPOs, shares of Zillow and Trulia have climbed more than 90% and 30%, respectively.
Also in a company like Zillo's favor is the fact that realtors are always on the go. More homes showcased on the Zillow website are viewed on mobile devices -- including 166 million mobile views in September alone -- than desktop computers, according to the company's most recent quarterly results. And as Zillow monetizes those views, they'll help fuel revenue growth. Zillow doesn't currently have any intentions of paying investors a dividend, but instead prefers to direct cashflow into growing its business, according to the 10-K.
The housing rebound -- though slow -- also has the potential to reward home decor' brands, such as Martha Stewart Omnimedia (NYSE: MSO). In a recent CNBC interview, Martha Stewart expressed optimism in the economy and was hopeful that individuals would have a better life over the next several years than has been the norm since the recession. As home sales and home prices improve, perhaps consumers will spend more money on brands like Martha Stewart to furnish and decorate their new homes. Maybe this will help to fuel sales and the stock price, the latter of which has languished and is trading 42% below its 52-week high.
The housing recovery has most industry participants starting from ground zero in many ways. Companies like Hovnanian are willing to acknowledge that the recovery is unprecedented because the market lows were historic. That's why they are taking things slower this time, and even if the stocks aren't shooting stars anymore there are at least some factors working in the housing industry's favor once again that could benefit a portfolio in coming months and years.
GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Zillow. Motley Fool newsletter services recommend Martha Stewart Living and Zillow. 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.
