High Profits from Home Builders at Low Prices
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While the housing market in the United States continues to recover, there are still many homebuilder stocks selling at very attractive valuations. The full fury of The Great Recession was unleashed upon the real estate sector of the United States. Those homebuilder stocks that have survived this onslaught offer the potential for high profits as many of the share prices are at very low levels.
In December 2006, financial columnist Jon Markman wrote the article, "Time to Buy Horrible Homebuilder Stocks," recommending touting homebuilder stocks such as Toll Brothers (NYSE: TOL), KB Homes (NYSE: KBH) and PulteGroup (NYSE: PHM) as "they are bloody cheap."
At that time KB Homes was around $53, with Toll Brothers at close to $33, and PutleGroup at about $40 a share. Beazer Homes (NYSE: BZH) was over $45 a share. DR Horton was well over $40 in 2005. The exchange traded fund for home builders, SPDR S&P Home Builders (NYSEMKT: XHB) was trading at over $38 a share.
At present, KB homes is around $10.75, Toll Brothers is about $30.80, DR Horton is near $18.55, PulteGroup is around $12.79, and Beazer Homes is around $2.80. SPDR S&P Homebuilders is around $22.40.
Homebuilders are appealing as the companies are operating at the most favorable end of the housing market. Existing home sales are not doing well for a variety of factors. There is a huge shadow inventory of, literally, millions of homes in various stages of foreclosure that will eventually have an impact on the housing market.
For homebuilders, that will be minimal. Buyers much prefer a new home. What buyers want now is simply not available in older homes. It is no different than how much more alluring a new car is as opposed to one built decades ago, as were many homes. New homes have nicer utilities, enhanced energy efficiency, better construction, with design and layout features that today's buyers want. Those simply do not exist in older homes and that will not change.
Government bodies at every level are doing everything possible to bring back the real estate sector, which is very bullish for home builder stocks. The most obvious policy is the low interest rate environment. Federal Reserve Chairman Ben Bernanke has pledged that this will remain until at least 2014. That leaves plenty of time for home builders to continue to recover.
Home builder stocks are recovering. Year to date, PulteGroup is up 100.71%. During that time segment, KB Homes has jumped 61.75%. Over the same period, Toll Brothers has risen by 50.83%. For 2012, Beazer Homes has risen 12.75%. Since January 1, the SPDR S&P Home Builder exchange traded fund is higher by 32.10%.
There is still much more for the share prices to increase before the levels are reached that existed previous to The Great Recession hammering the foundation of the housing market. Full recovery will not be reached until the economy rebounds with more jobs in the United States. At present, economic growth is falling in the US with the unemployment rate rising. That is not propitious for a strong recovery in housing. However, for new home builders, the rebound has obviously commenced.
More gains lie ahead as the desire to buy a home is one that most Americans posses. This has allowed home builders stocks to rebound very powerfully in 2012. It will allow for even more recovery in the future as the upside in the share price has been demonstrated.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.
