Home Builders Rise as Housing Recovery Presses On

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

Several news sources recently reported that the confidence of US home builders surged in June – a signal that the housing market recovery is gaining ground.

A consensus of home builders believe conditions for new construction are favorable for the first time since the housing market tanked seven long years ago. This green shoot of optimism was recently reported by the National Association of Home Builders/Wells Fargo Housing Market Index.

Home Builders Confidence is Robust

Leading home builders note that home prices are rising and the inventory of homes for sale is tightening. Combined with a slowdown in foreclosures, these factors are boosting the housing market. The spike in confidence was said to be “surprisingly robust,” according to a recent Reuters report.

In sum, the housing market index spiked to 52, up from 44 in the previous month, and this beat many analysts’ forecasts. Readings above 50 mean a consensus of builders believe market conditions are favorable rather than poor. The confidence metric is up by 23 points from the same period in 2012.

Other Factors Could Curb Housing Market Enthusiasm

While the confidence report is a good indicator for share prices, there has also been a recent spike in interest rates. Some market observers are concerned that the Federal Reserve may start to unwind its standing monetary policy of quantitative easing, and rising rates will push prices higher. Some analysts argue this could slow down the housing market recovery.

Further, while foreclosure rates have slowed, lenders still have inventories of foreclosed properties to bring to the market. And if these distressed properties go up for sale, the demand for new homes will be challenged.

In the meantime, the confidence report and nascent housing recovery have boosted share prices of US home builders like Lennar Corporation (NYSE: LEN), Ryland Group (NYSE: RYL), and Toll Brothers (NYSE: TOL).

Lennar’s Solid Second Quarter

Lennar Corporation is one of the nation’s home building leaders. In particular, the company builds single family dwellings designed for the first time home buyer.

Lennar recently posted solid second quarter results highlighted by adjusted earnings of 43 cents per share, which beat the consensus of analysts by about a dime. The big news is that earnings were up 105% from the same period in 2012. This was due to solid growth in home building revenues and pricing margins - indicators the housing market is in a nascent recovery regardless of the recent concerns over rising interest rates.

Ryland Regroups

Ryland Group is another of the big home builders in the US. However, unlike Lennar, Ryland’s homes are designed for buyers looking to “buy up.” This is a key factor to consider because these buyers are critical to the housing recovery.

This is because they are less price sensitive than first time buyers, and should not be put off by rising mortgage rates – which remain at historic lows. The company operates in 14 states, and it also plans to expand into the lucrative Dallas market. Ryland has reportedly spent $1 billion buying land in this and other targeted markets.

Finally, Ryland anticipates very robust earnings growth of 189% for 2013. This is a remarkable turn around since the housing market tanked in 2006. The company has operated at a loss every year since then. But their results so far in 2013 are another sign that the housing market recovery is gaining traction.

Toll Brothers Takes the High Road

Toll Brothers designs, builds, and sells dwellings in luxury residential communities. So this outfit’s market niche is a bit different than both Lennar and Ryland. But like Ryland, Toll Brothers’ buyers are less likely to be intimidated by rising rates and prices.

Toll has a market cap of $5.5 billion and a P/E ratio of 11.2, which is well below the S&P 500 ratio of 17.7, meaning that there is plenty of room for share price growth. Shares are up by a bit more than 3% so far in 2013. If the market recovery gains steam, the outfit’s share price should continue to rise as long as revenue and earnings growth continues to climb.

The Bottom Line

Each of these home builders has performed quite well in 2013. This should be heartening to home buyers and investors looking to get back into the real estate sector. This is especially so since Lennar, Ryland and Toll Brothers operate in different niches – an indication the housing recovery is broad-based.

Of course, many have shied away from housing in the wake of its making like a house of pancakes in 2006. But if the numbers reported so far continue on this trend line, the housing market is on the rise. That said, investors should also consider the challenges still facing the housing sector. Another way to go is investing in a Real Estate Investment Trust (REIT), since these trusts provide a pathway to the real estate market along with risk management.

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Kyle Colona has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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