1 Number That Forecasts a Great Year for Housing
Jan 23rd 2013 5:22PM
Updated Jan 23rd 2013 6:10PM
The housing rebound has been under way since mid-2011, when the numbers made it impossible for a turnaround to not happen. Still, it's taken every bit of time since then to convince most that the housing boom is pending. The big housing developers have watched their stocks rise triple digits over that time period, with analysts and pundits predicting double-dips and setbacks all the while. It's impossible to go back and take advantage of that phenomenal investment opportunity, but this one number suggests you don't need a time machine to make money on the (continuing) housing turnaround.
Are you still unconvinced?
The economy as a whole has been lackluster since the depths of the financial crisis, but to me it's like the Van Gogh effect in reverse. From a distance, things are a mess. What with fiscal cliffs, debt ceilings, and still unappealing unemployment levels -- who can blame those who want no part in it? But when you take out the microscope and look closer, that broad mushiness becomes fine, attractive details.
Housing is one of the greatest market bellwethers, and it's been a strong 18 months. Just take a look at Lennar , one of the leading home manufacturers in the United States. Since September 2011, the stock has climbed nearly 183%. Compare that with the S&P 500's 21.6% over the same time period. An isolated example? Not at all. KB Homes , the other oft-mentioned homebuilder, watched its stock climb 150%.
Think maybe they were just unfairly undervalued? Nope. These companies have grown because the housing market was at a statistical low a couple years ago. With rising populations, aging homes, and a (somewhat) return to a stable economy, there just weren't enough new housing starts or current inventory to match the other factors. It was a plain and simple supply-and-demand issue.
OK, why should you care? All of this already happened and the money has been made, right? I'd argue there is still time to profit from the return. Sure, you may not be in for triple-digit gains in a year and a half, but that's what you get for being late to the party.
Forecasting a strong year
According to The Wall Street Journal and real estate website Realtor.com, housing inventories are low, low, low. Despite the recent uptick in activity over the past couple of years, the end of 2012 held the lowest inventory of homes available for sale in the past five years.
Specifically, at the end of December, there were 1.57 million homes for sale, according to Realtor.com. That's 6.5% lower than in November, and more than 17% lower than the year-ago number. In the meantime, early signs indicate strengthening demand from buyers. It doesn't take a top I-bank analyst to put this one together:
Big demand + low supply = high prices.
Oversimplified? Yes, but it's essentially what we're looking at for 2013. And in certain markets, things look even more encouraging for the coming year. Take Sacramento, for example. California's capital city led the inventory plunge with a 68% year-over-year decline. The West Coast led the downward drive, with Los Angeles, Seattle, and San Francisco all dropping 40% or more in inventory.
So what does this mean for investors interested in housing? Hint: Good things.
Lennar has already shown us that the housing rebound has materialized in the form of profits. The company just reported earnings, showing us net income up a lovely four times from the year-ago quarter. Not leaving anything up the imagination, CEO Stuart Miller said, "During our fourth quarter, the housing industry took further steps toward a sustained recovery." The strong results were a product of higher prices, more sales, and increased mortgage activity. Basically, everything we said was going to happen was and is happening.
KB Homes reported back at the end of December, and it wasn't quite as tantalizing, but certainly impressive. Fourth-quarter revenues were up 20% year over year, and the backlog had grown 35% -- a great sign for the year to come.
In my opinion, either of these stocks will be great holdings for 2013. I would go as far as to put them in the "no brainer" category. Of course, you need to decide whether these stocks fit your risk tolerance and if they deserve a spot in your coveted portfolio.
The early bird may have already eaten the worm on the housing recovery, but you can still get a seat at the table for the main course.
More from The Motley Fool
With the Greek debt crisis and slowing growth in China, many investors are worried about heady growth going forward, but fear not, because the future is made in America. Domestic manufacturing is poised to once again become the investment driver of the world, and all because of one disruptive technology. You can uncover the three companies that will become the American Steel of tomorrow in our analysts' new free report. Just click here to read more.
The article 1 Number That Forecasts a Great Year for Housing originally appeared on Fool.com.Fool contributor Michael B. Lewis and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.