Is There an Opportunity to Invest in Housing?

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

The U.S. housing market is recovering from the housing crisis that began seven years ago. Due to strong demand, short supply, low mortgage rates, and an improving job market, demand for houses has increased. Housing prices rose 12.2% in May, year-over-year, which has created favorable conditions for the homebuilders. The improving U.S. homebuilding market will help housing companies enhance sales, average selling prices, and capability to maintain consistent profitability. Let’s see how these housing companies perform in the improving homebuilding market.

Acquiring new homes sites

In June, Beazer Homes USA (NYSE: BZH) acquired 220 home sites in Howard County, Maryland to build single-family homes and two-car garage town-homes for middle class and upper-middle class customers. The community, called Wincopia Farms, is located between Washington D.C. and Baltimore. This will provide easy access to major employment centers, and the school district zoned for the community is the most highly reputed school system in the country. Sales will begin in early 2014 and the expected average selling price, or ASP, is $292,000 in 2014 from $272,000 currently.

Beazer recently acquired 232 acres of land in Frisco, Texas, the most active sub-market for new homes in the country, to meet upper-class customer demand. In this location, the company looks forward to the completion of its master planned community of Miramonte, which will include several features like trails for biking, ponds, an amenity center, and a pool. The new houses will be located in Miramonte’s highly reputed Prosper Independent School District. The development of this community will commence in early 2014 with sales beginning in late 2014. Breazer’s total home sales will increase from $999 million in 2012 to $1.29 billion this year and $1.52 billion next year.

Strong pricing will drive more revenue

In California, home prices are increasing due to strong demand and a shortage of supply. To take advantage of this opportunity, KB Home (NYSE: KBH) has raised this year’s land investment spending to $1.2 billion from $1 billion. This will help the company increase its community count from 178 this quarter to 193 by the end of this year and around 221 in 2014. The company expects the ASP to be between $285,000 and $290,000. KB Home's total revenue will boost once these communities begin selling.

The occupancy rates are above 90% in major Texas markets due to increase in the demand for houses led by a rise in number of newcomers and job growth opportunities. As Texas has become a lucrative housing market, KB Home acquired 100 acres of land to build a new community, dubbed Lakewood Pines in Atascocita, in Houston, Texas. The new community will be located near Houston Lake and will accommodate around 300 home sites.

The company is also planning to acquire an additional 250 acres near Lakewood Pines that can accommodate up to 700 home sites. It will start land development this year and construction of model homes in mid-2014. Housing sales expected for this year are $2.12 billion, which will increase to $2.42 billion next year. With a rise in sales and community count, the company will generate positive diluted EPS of $0.55 this year and $2.04 next year compared to -$0.76 in 2012.

Sales will accelerate by monetizing readily available lots

In order to take advantage of rising demand and the improving U.S. housing market, Hovnanian (NYSE: HOV) is spending on land acquisitions across U.S to improve profitability. It will increase its community count to 184 from 175 by the end of the year. During the second quarter, it spent $118 million on land and development. Around 92% of the lots will sold in 2014, boosting Hovnanian’s total revenue to $1.89 billion this year up from $1.4 billion in 2012 and $2.31 billion next year.

Hovnanian can readily use nearly 6,800 lots in the U.S., out of which 70% are in California. It has selected around 1,000 lots to develop into communities in the next few quarters. Monetizing these lots allow the company to accelerate its sales opportunities, and gross margin, as California home prices continue to rise. In the most recent quarter, the company reported home sales of $409 million, and it will rise to $580 million in the fourth quarter. Therefore, the company expects positive EPS of $0.20 this year, compared to -$0.52 in 2012, and $0.60 in 2014.

Conclusion

All three companies are major players in the housing market of the U.S. The companies will continue to benefit from the improving U.S. homebuilding market and the increasing demand.

Beazer will benefit from the new communities built for middle class and upper class residents of the U.S., which will boost the company’s revenue. Strong demand and increasing home prices in California will help KB Home to generate profits, and investing in a lucrative housing market, like Texas, will increase its sales in the coming years. Hovnanian is expanding communities by taking advantage of continuous improvement in U.S. housing prices and upside in home prices in California will drive high in the coming years.

Therefore, I recommend a buy for all three stocks.

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Shweta Dubey 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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