Invest in the Real Estate Recovery Now
Hans is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I live in Tampa. The housing bust massacred this area. Houses have been for sale for 12 to 18 months without success. Dilapidated foreclosures were abundant. New constructions were ceased and just sat there as an eyesore near the beautiful bay because the project developers went bankrupt. It has been a huge weight on Tampa’s economy.
There is good news though. I cannot speak for other markets, but here in Tampa, things are looking better. Just have a look at the numbers below, comparing the October 2011 vs October 2012:
- 35% increase in number of homes sold
- 9% increase in average sales price with 12 months of consecutive monthly growth
- Only 4 out of 10 homes sold have been categorized as “distressed”
- 40% drop in inventory which is equivalent to about a 4 month supply
So what is kicking this off? The growing consensus of the end of the housing bust has pulled in investors who are buying out the properties while deals can still be found. Banks are now only drip feeding foreclosed homes onto the market and are processing short sales much faster so that they do not become foreclosures, keeping inventory low. Homeowners who previously could not sell their home are now testing the waters again. For the first time in 6 years, you can sense a positive vibe in real estate.
Will the real estate market be a booming sector next year? I do not think so. Not until unemployment rates drop, salaries will rise, and the fragile economic recovery turns into a confident and strong expansion. It will take a few years to reach that level of confidence. For the long-term investor, that makes today the perfect time to step in.
Popular growth stocks associated to the real estate market include Zillow (NASDAQ: Z) and Trulia. These are the “social media” type real estate stocks. Out of these two Zillow is profitable, though it comes with a hefty premium. Premiums are fine, I just do not think Zillow is a smart investment. Zillow does not have the networking effect despite being categorized as a social media business. It is an enhanced online classifieds section with a gimmick that estimates the price of your home called “zestimates.” Zillow pushes information to the market. There is no networking effect that keeps the engagement going which is what advertisers in the end will pay for.
What is more concerning, is that Zillow recently announced its acquisition of Mortech. Mortech is a software and services company that provides mortgage related solutions to lenders. This a deviation to what Zillow has been saying it was going to do over the past 6 months. I think this acquisition is not about expanding their business, but more a recognition that their current business model is not sustainable, despite a decent third quarter. Despite the recent pull back, with a PE well over a 100, that makes me too nervous.
A more traditional and popular choice to play the improving housing market is Home Depot (NYSE: HD). They just reported, almost to their own surprise, some stellar results with over a 23% increase in earnings year over year. Even if you are a bit skeptical about the statistics on the improving Tampa market, Home Depot’s results are an indication that the recovering trend is national, not local. Home Depot is a company I am looking at to pair with what I believe can be a multi-bagger play: Ellie Mae (NYSE: ELLI).
If you want to make a bet on the real estate market and you are seeking an alternative to traditional options such as
Ellie Mae’s success is based on its Encompass360 solution which can be either bought by mortgage lenders as a software solution to be integrated into their own IT environments, or used on-demand as a Software as a Service solution hosted on Ellie Mae’s own network. Ellie Mae brings all the components involved in processing mortgages under one umbrella through one portal. This is unique in a fragmented industry. 20% of all residential mortgage originations run through Ellie Mae’s solution. And that is during bad times!
Ellie Mae is a bargain:
- Its share price is up about 400% in 2012
- Trailing PE of 32
- Forward PE of 26,
- With a PEG of 0.70 it is undervalued relative to its growth projections
- It trades about 20% off its all time high
That is way cheaper than Zillow and when you look at the PEG even a better deal than Home Depot. I think a less risky option with as much growth potential will be hard to find.
BEF1973 owns shares of Ellie Mae. The Motley Fool owns shares of Zillow. Motley Fool newsletter services recommend Ellie Mae, The Home Depot, 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.