It seems highly improbable considering the dismal headlines lately that anyone would be investing in the US housing industry. Home prices are currently a third lower from their peak in 2006, and home ownership has also fallen to new lows.
There has been new life, however, in residential construction stocks which have risen by 6.5% in the past three months, versus the 1.9% gain for the S&P 500 index during the same time frame. Of the residential construction stocks that have seen gains in the past few months, five of the top builders have produced gains in the double digits.
Residential construction stocks are down 26% for all of 2011, versus the 3.4% decline in the S&P, but the trends seen in the last three months could be indicating a broader trend to the upside for a select group of homebuilders.
Signs Point To A Boost For The Housing Industry
There has been no shortage of bad news coming from the housing sector in the wake of the US financial crisis. The struggling economy has been hindered by the failure of the housing market to rebound as foreclosures have mounted, and homeowners have seen home prices plummet.
On Tuesday, analysts for Standard & Poors announced that national home prices have fallen to levels not seen since the second quarter of 2003, disheartening news for prospective investors. With so much negativity surrounding this sector, investors have remained rightfully cautious.
Even so, mutual funds and institutional investors are purchasing stock in homebuilders going into 2012, focusing on the handful of companies that held up during the worst decline in the housing market seen since the Great Depression.
Following a decade of overbuilding and a painfully slow economic recovery, the housing market is the worst it has been in a generation. Combined with the reluctance to lend by financial institutions, challenging new lending standards, low consumer confidence, and high unemployment the sector has been severely crippled in the past few years.
There have been signs, however, that the housing industry may be getting a boost in the near future. In September new-housing starts rose by 15%, the highest level seen in 1½ years according to a statement by the US Commerce Department. This statistic, in conjunction with record low interest rates and the mindset that things could not get any worse, has served to bolster some homebuilders’ fortunes.
The housing market’s severely depressed prices carry a high potential for an impressive rebound according to historical precedent, and could provide investors with a stellar upside opportunity. The catch is that industry experts expect a protracted industry bottom, raising questions as to how long retail investors can hold out for a rally in this sector.
Best-Of-Breed Stock For A Play On The Housing Industry
For a play on the housing industry, it a good idea to take a look at the “best-of-breed” in this sector, and with operations in fifteen states, Lennar (LEN) is one of the biggest and most geographically diverse homebuilder in the United States.
In the past three months, shares of Lennar have surged 24%, although they are down 10% for 2011, they are higher by 13% year-to-date. Third quarter results for Lennar are also noteworthy with revenue that was more or less flat for the quarter, robust gross margins, and increased orders and deliveries.
Analysts have an average price target of $26 for Lennar, an upside of 53% to its current price for investors who are willing – or able – to wait for a rebound.