The housing market is back. That news has been popping up throughout August based in part on the word that storied investor Warren Buffett is “betting big” on housing, according to a Wall Street Journal video featuring housing reporter Joe Light (http://live.wsj.com/video/why-buffett-is-betting-big-on-housing/432BAEE2-88DB-4382-9496-2DA9F86E3047.html?KEYWORDS=joe+light+housing#!432BAEE2-88DB-4382-9496-2DA9F86E3047).
Light brings up some excellent points aimed at the retail investor. They include:
- New home inventories are the lowest they have been in almost five decades. As of Aug. 2 there were only 144,000 new homes for sale.
- Home prices have started to “inch up,” based on the Case-Shiller Home Price Index and other similar reports.
Light suggests that the most important thing for home prices is momentum, which he says is now in home prices favor. Along with the momentum effect, the other important indicator is price-to-rent ratios, comparing home prices to rents, which are back to the very low level they were at in either 1999 or 2001, depending on what index you are looking at.
For retail investors, Light says there are two ways to play this improving housing market: either by buying commercial real estate investment trusts which are focused on properties with short leases such as self-storage units where owners can raise the rents quickly as the economy gets better; or by buying home builders. As examples, he listed Lennar and KB Home.
Light’s views on the low supply of newly constructed homes was seconded by J. Allen Smith, chief executive of Prudential Real Estate Investors, owners of about $50 billion in real estate assets. In part of a wide-ranging interview in the Aug. 29 the New York Times, Smith said “new construction starts are so low that even with an anemic economy–one bouncing along at 2 percent growth–the supply-demand fundamentals will continue to improve.” (http://www.nytimes.com/2012/08/29/realestate/commercial/the-30-minute-interview-j-allen-smith.html)
Housing prices, even in the hardest hit areas like Miami, Atlanta and Detroit, seem are “inching up” nationally “for the first time since 2010, when sales were helped by a temporary tax credit for home buyers,” according to another story in the Aug. 29 New York Times (http://www.nytimes.com/2012/08/29/business/economy/home-prices-rise-survey-shows.html).
There are several small cap home builders to choose from, including four we have covered in the recent past.
Red Bank, NJ-based Hovnanian Enterprises (NYSE: HOV, http://www.khov.com/) specializes in single-family detached homes, condominiums and town homes and operates in two segments: homebuilding and financial services. The company’s 52-week trading range shows it was trading for as low as $0.89 last October and then went on a tear, going as high as $3.31 in early February. When we last checked on July 11 it was trading for $2.65 and its market cap was about $350 million. It closed Aug. 31 at $2.92, up 20 cents for the day, increasing its market cap to more than $370 million.
Los Angeles-based KB Home (NYSE: KBH, http://www.kbhome.com/) is also a home building and financial services company catering in large part to first time buyers. KB is an old Southern California home builder, founded in 1957 and formerly called Kaufman and Broad. Back on July 11 its market cap was $754 million and it was trading for $9.74. It closed Aug. 31 at $11.04, up 17 cents for the day, increasing its market cap to $851 million.
Columbus, OH-based M/I Homes Inc. (NYSE: MHO, http://www.mihomes.com/) builds single family homes primarily in the Midwest, Mid-Atlantic and southern parts of the U.S. The company was founded in 1973 and, like most of the other builders, has homebuilding and financial services divisions. Back on July 11 its market cap was $331 million and it was trading for $17.50. It closed Aug. 31 at $19.30, up 32 cents for the day, increasing its market cap to $352 million.
Atlanta-based Beazer Homes USA (NYSE: BZH, http://www.beazer.com/) builds and sells single-family and multiple-family homes in 16 states in the U.S. It also acquires, improves and rents homes. The company operates through commissioned home sales counselors and independent brokers. Back on July 11 its market cap was about $283 million and it was trading for $2.86. It closed Aug. 31 at $2.94, up 6 cents on the day, increasing its market cap to $297 million.
Two home builders we didn’t cover previously, that are both trading near their 52-week highs include:
Irvine, CA-based Standard Pacific (NYSE: SPF, http://www.standardpacifichomes.com/) builds single family and detached homes targeting a range of homebuyers. It also provides mortage financing services through its mortage finance subsidiary, Standard Pacific Mortgage. It’s market cap is currently $1.34 billion and 52-week trading range is $2.17-$6.71. It closed Aug. 31 at $6.70 up 14 cents for the day.
Westlake Village, CA-based The Ryland Group (NYSE: RYL, http://www.ryland.com/) a homebuilder and mortage finance company. RYL covers many aspects of the home buying process including design, construction, title insurance and escrow. Its 52-week range is $9.15-$27.15 and its market cap is $1.21 billion. It closed Aug. 31 at $26.81, up 81 cents for the day.