Opportunities in the building sector is getting bigger. Read more in this MarketList.com article.
There are two major stories happening with the builders, and those are the dearth of homebuilding since the real estate bust as well as low household formation numbers and low building that have created a lot of pent-up demand for new homes. Low household formation numbers were not driven by fertility rates 30 years ago. They were driven by the lousy economy. The important thing to remember is that even in lousy economies, people still get married, have kids, and ditch the roommates. So, if you look at the drop in household formation numbers, remember the drop represents people who do want to buy a home but aren’t in a position to, at the moment. That will change.
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The U.S. recently hit 1.1 million housing starts (which is an annualized number). This is a big number compared to the past few years, but it’s not big historically. The U.S. averaged about 1.5 million units a year since the 1950s. During recoveries, we’ve seen years where starts were above 2 million a year and averaged 924 last year. Given how much the builders have underbuilt, there’s a secular (long-term) story that should buoy the builders for several years.
If the economy recovers and the first-time homebuyer returns to the market, we should see housing starts at least approaching average levels if not spiking like they have in prior recoveries. KB Home’s stock price is probably priced for another 1 million year in housing starts. If starts improve, KB Home’s earnings will improve—even if margins fall.
The cyclical side is different—the builders are very cyclical stocks. This means when times are bad, they trade at very high multiples. When earnings are great, they trade at single-digit multiples. So an investor could get it right about earnings only to see multiple compression offset the earnings. While KB Home (KBH) could experience high earnings growth, it’s not a “growth stock” the way Twitter (TWTR) is, and it will never command the type of multiple that Twitter will (when it eventually earns money). This same analysis applies to other builders like D.R. Horton (DHI), Lennar (LEN), PulteGroup (PHM) and Toll Brothers (TOL).
Investors that are interested in investing in the homebuilding sector should take a look at the S&P SPDR Homebuilder ETF (XHB).
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