Home is where the recovery isOctober 4, 2012: 10:12 AM ET
This article was published in the October issue of Money magazine.
Stop me if you've heard this one before: The housing market has finally hit bottom. After years of false hope, that may seem hard to believe. But home sales are indeed rebounding. And prices nationwide climbed 2.5% in June.
Be careful, though, about how you invest in this nascent recovery. Homebuilder stocks have been surging for months in anticipation of a rebound. Shares of Lennar and KB Home have soared around 60% in 2012, while PulteGroup has more than doubled.
"Things are looking up in housing," says Harry Clark, CEO of Clark Capital Management Group, "but you can't buy the builders now."
As for real estate investment trusts, many are getting frothy for an altogether different reason. As yield-starved investors have flocked to them to boost income in an era of low rates, REITs have returned twice what the S&P 500 has over the past three years.
Follow the shoppers
Fortunately, you have cheaper options. Rising home sales have historically boosted revenue for housing-related retailers such as Home Depot (HD). The home-improvement chain, shares of which Clark's firm owns, says sales will jump 4.6% this year, after having fallen 1% over the prior three.
While HD shares are up 35% this year, they trade at a price/earnings ratio, based on projected profits, 20% below that of the homebuilders -- even though the stock has historically traded at a premium.
Tim Holland, a portfolio manager for the ASTON/TAMRO funds, which owns the stock, thinks HD has more room to run as the market slowly recovers.
Prefer to go with a fund? S&P Homebuilders ETF (XHB) owns all three stocks. Despite its name, this ETF holds 70% of its assets in shares of home-appliance, -furnishings, and -improvement chains and building-material makers.
Think outside the big box
Another option: lenders in healthy states that aren't suffering through the aftermath of a major housing bubble, Holland says. These banks will benefit as purchases and refinancings climb. He owns Little Rock's Bank of the Ozarks (OZRK). At 7.3%, Arkansas' unemployment is below the U.S. average. The bank is also pushing into Texas, with a booming energy sector.
As for an indirect play, there's Berkshire Hathaway (BRKB). Though not a pure housing stock, Warren Buffett's company owns several related businesses, such as the flooring company Shaw Industries and the paintmaker Benjamin Moore, notes David Rolfe, manager of the RiverPark/Wedgewood Fund, which owns the stock. Berkshire also has stakes in leading mortgage originators Wells Fargo and Bank of America.