3 Ways to Profit From a Housing Recovery

By Chad Fraser (Investing Daily | Original Link)

Yesterday brought more evidence that the U.S. real estate market is on the mend. The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) came in at 47 for the month of December. That’s up two points from November and marked an eighth consecutive month of gains. It’s also the index’s highest level since 2006. The HMI tracks builder confidence in the market for newly built single-family homes.

“Builders across the country are reporting some of the best sales conditions they’ve seen in more than five years, with more serious buyers coming forward and a shrinking number of vacant and foreclosed properties on the market,” said NAHB chairman Barry Rutenberg.

Fiscal Cliff Is a Wildcard

Still, there are good reasons to remain cautious. For one, while the HMI figure has been steadily improving, as the NAHB points out in its release, stricter loan qualifications continue to slow mortgage approvals—which is an ongoing headwind for the overall market.

Another factor hanging over real estate deals is the fiscal cliff. If a deal isn’t reached by January 1, many economists feel that the economy could go back into recession. That would hurt consumer confidence and push up unemployment, which are obvious negatives for the housing market. As well, even if a deal is reached, there is a chance that it could include limits on mortgage interest deductibility, which would also hurt real estate.

Despite these uncertainties, the trend over the past few months points to a steady pickup in housing market activity. Consider the following:

  • U.S. housing starts hit a four-year high in October, climbing 3.6% to a seasonally adjusted yearly rate of 894,000 units;
  • Home prices were up 6.3% in October from a year ago, according to a report from research firm CoreLogic quoted by CBS Moneywatch;
  • Pending sales of existing homes were up 5.2% in October, according to the National Association of Realtors;
  • DeptofNumbers.com says that housing inventories are down 22% from a year ago;
  • Mortgage finance company Fannie Mae said yesterday that it expects house prices to rise 8% in 2013.

There are a number of ways for investors to profit from the recovery. Below, we look at three. One is a major homebuilding stock, another is a niche player that sells title insurance, and the third is an ETF that holds not only homebuilding stocks but shares of other companies tied to the housing market, such as retailer Home Depot (NYSE: HD).

Leading Homebuilder’s Stock Keeps Rising

An obvious way to profit from rising sales of new homes is to buy shares of the companies that build them.

In the past, we’ve written favorably of Lennar Corp. (NYSE: LEN), the nation’s third-largest homebuilder. Investing Daily’s Jim Fink saw Lennar’s recovery coming way back in March 2010, when Lennar first showed signs of returning to profitability after three years of brutal losses. Fink liked the fact that Lennar had focused on lowering its debt and taken advantage of the weak market to snatch up attractive lots, often at bargain-basement prices.

The stock has put on an incredible performance in the last 12 months, gaining 112%. Earnings continue to blow past expectations, as well. In its latest quarter, Lennar’s profits soared to $87.1 million, or $0.40 a share, from $20.7 million, or $0.11, a year earlier. That was well ahead of the consensus forecast of $0.28. Revenue rose 34%, to $1.1 billion from $820.2 million.

The company delivered 3,655 homes during the quarter, an increase of 28% from a year ago, and clocked 4,198 new orders, up 44%. Its backlog stood at 4,513 orders, up 79%.

Niche Market Leader Offers Another Way to Profit From a Housing Rebound

If you’re looking for a more niche play on a housing recovery, consider title insurance providerStewart Information Services (NYSE: STC). Investing Daily contributor Greg Pugh analyzed this stock in an October 16 article.

Title insurance protects buyers from past problems relating to the home’s ownership, such as mistakes on deeds, unpaid property taxes from the previous owner, liens or forgery. A title search is performed upon purchase, but there is always the possibility of something being missed. Title insurance protects buyers from that eventuality and provides peace of mind.

In the third quarter, Stewart reported earnings of $34.7 million, or $1.45 per share, up sharply from $4.5 million, or $0.22, a year earlier. Revenue jumped 24.4%, to $520.7 million from $418.5 million.

Stewart’s stock has also risen sharply, with a year-to-date gain of 130%. However, it still trades at a reasonable 11.86 times the $2.26 a share the company earned in the last 12 months. Stewart is forecast to earn $2.67 a share in the coming year; the stock trades at 9.99 times that figure.

This ETF Gives You Instant Diversification Within the Housing Sector

Beyond stocks, you could look to a housing-related exchange traded fund for exposure to the sector.

One option is the SPDR S&P Homebuilders ETF (NYSE: XHB), which tracks the S&P Homebuilders Select Industry Index. The fund’s top holdings include retailers like Home Depot, Lowes Companies and Bed, Bath & Beyond; homebuilders like D.R. Horton, Lennar and Toll Brothers; and a range of others, such as appliance maker Whirlpool Corp.

The ETF’s expense ratio is 0.35%. It yields 0.88%. In the past year, the fund has risen over 66%, compared to just 18% for the S&P 500.

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