Yahoo Finance Ride the Housing Recovery With These Stocks to Buy
Existing home sales have been rising in recent months as pent-up demand, low mortgage rates and an improved labor market boost homebuyers' confidence. The recovery in the housing market is expanding throughout the economy to lift everything from mattress companies to home improvement stores to roofing suppliers, creating opportunity for investors to ride the housing market's recovery.
Through July, housing starts surged 10.1 percent year-over-year, existing home sales climbed 10.3 percent and new home sales skyrocketed 26 percent, says Patrick O'Hare, chief market analyst at Chicago-based Briefing.com, a live market analysis company. In July, existing home sales hit a seasonally adjusted rate of 5.59 million in July, up from 5.48 million in June.
"The housing numbers all show nice improvement," O'Hare says. Perhaps even more importantly, there is "a lot of upside potential" in the housing market as home sales rates remain below their peaks in 2005, he says.
More millennials are entering the market, says Hilary Kramer, founder of the GameChangers newsletter and other financial products. "About 40 percent of the millennials want to buy and haven't done so yet. That represents a market of about 41 million first-time homebuyers eager to be matched with inventory," she says.
The multiplier effect from the housing recovery is far-reaching. It starts with increased demand for building materials and expands widely from there. "The more houses that get built, the more aggregate demand for copper, cement, steel, construction board and other materials we see. It also keeps more than 6 million construction workers busy," Kramer says.
Home sales also help other segments of the market. "You might buy an existing home at the right price for you. But it might not have the right look for you, so you remodel and fix it up to your liking. People spend more on furnishing, remodeling, flooring, carpeting and goods and services related to housing," O'Hare says.
Here's a look at investments analysts say could benefit from the recovery in the housing market:
Homebuilder stocks. Homebuilder companies are benefiting from new household formation as millennials finally move out of their parents' basements and into their own homes. "We have a positive outlook on homebuilders because of relatively low interest rates, lower costs for raw materials for builders and pent-up demand," says Erik Oja, equity analyst at New York-based S&P Capital IQ.
D.R. Horton Inc. (ticker DHI) is a national homebuilder operating in 27 states, and is rated a "buy" by S&P Capital IQ. "They have a strong balance sheet, which is important in this environment," Oja says. D.R. Horton offers three tiers of price points including entry-, mid- and higher-level homes. "They are relatively shielded against a downturn in any one region or economic class," Oja says.
Exchange-traded funds. The iShares Trust U.S. home construction ETF (ITB) and the SPDR S&P Homebuilders ETF (XHB) include a basket of builder and home-related stocks. "Investors need to take into account there is greater risk in individual stock selection. Even though these important trends in the housing market work to the advantage of a lot of companies, their success ultimately lies in having good management," O'Hare says. "One way to mitigate that risk is to diversify with an ETF. If you are looking to take advantage of the uptrend in the housing sector, either XHB or ITB would be an opportunity to look at."
Furnishing companies. New homeowners need to furnish their new digs, and Tempur Sealy International (TPX) is poised to benefit from this trend. "This is a pure play on every new bedroom that gets built and occupied," Kramer says. "It may look a little expensive here at around 22 times current earnings, but the fact that it's growing that profit base by 18 percent to 20 percent a year right now speaks for both its own strength and the overall housing environment."
Kramer also points to Wayfair (W) as another stock to consider. Wayfair is an e-commerce company offering home furnishings from the low-end to high-end spectrum. "Wayfair is white-hot and expanding its sales by 50 percent a year right now. This is the future of retail, and it could become a $50 stock again fairly soon," Kramer says.
Building materials firms. The new home side of the housing recovery helps companies like Owens Corning (OC), an insulation and roofing company, and Beacon Roofing Supply (BECN), O'Hare says.
Cemex (CX) sells concrete and other construction materials in the U.S. and internationally. "You're getting cement from Mexico here, where the industry is benefiting from a weak peso and easy export to U.S. construction markets. Based on existing targets and growth rates, this stock could be worth as much as $12. Right now, even a relief bounce from the recent emerging markets sell-off could take us back to $9 in a relatively short period of time," Kramer says.
Home remodeling companies. What new homebuyer doesn't head to Home Depot (HD) or Lowe's Companies (LOW) at least once? Other companies that will have the "wind at their back with the improving trend in the housing market include flooring companies: Mohawk Industries (MHK), Armstrong World Industries (AWI) and Tile Shop Holdings (TTS)," O'Hare says.
The recovery in the housing market has built up some speed but is not close to topping out, Kramer says. "Trust what the data tells you. As long as we keep having kids and they keep growing up and moving out, this is going to be a growth market in the long term. And with nearly a decade of supply lagging demand, the overbuilt conditions of 2004-05 are a memory now, while the millennials are hungrier than ever to have something they can call their own. "
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