3 Ways to Play the Housing Recovery

by Adam Benjamin | May 7, 2013 8:08 am

3 Ways to Play the Housing Recovery

If you’ve paid even the slightest bit of attention to financial news lately, you’re more than aware that the housing market is on the upswing.

Most signs right now do point to a general recovery in housing. Pending home sales grew faster than expected[1] in March, consumer confidence[2] is climbing and home prices are on the rise[3]. Sure, there are some signs to the contrary, like April’s drop in homebuilder confidence[4], but the consensus seems to be that, at least for the moment, housing is on its way up.

So if you believe in the continued upswing and haven’t yet jumped in … how should you go about it?

Well, there are a few flavors, ranging from direct plays like homebuilders to peripheral plays like DIY retail stores. Let’s take a closer look at each of these groups of stocks to see how they can benefit from further upside in the real estate space.

Homebuilders

Obviously, the most direct way to get in on the housing boom is to buy stock in the companies building the actual houses.

As consumers begin to feel more financially secure and start looking for new homes, homebuilding companies are going to see the immediate benefits, as seen in the breakneck performances of these sector stocks and others.

PulteGroup announced that it would add another $200 million to its annual investment in land and development for 2013 and 2014, showing just how confident the homebuilder is in the recovery.

Data Providers

Naturally, when homebuyers go on the hunt for new residences, home listing services should benefit. The difference here is that while homebuilders depend purely on new housing, listing services also can benefit from existing home sales.

In the digital age, home listing websites have the advantage over traditional print media. Sites like Zillow (NASDAQ:Z[8]) and Trulia (NYSE:TRLA[9]) allow users to search for homes and filter through data like commute times, local amenities and even value estimates for adjacent properties.

Searching for homes is an inherently mobile activity (at some point, you’re going to have to go visit the place), and these sites have done an unusually good job monetizing traffic[10] — especially for mobile devices.

Zillow and Trulia have been on fire in response, with each more than doubling in just four months.

Retailers

As people buy new homes (or upgrade to larger existing homes), they’re going to buy new stuff — lamps, curtain rods, furniture, patio accessories — and that’s where home retail companies come in.

However, the bump in these companies can sometimes lag the aforementioned industries. That’s because new home owners might be short on cash after a down payment, for instance, and thus be forced to wait a few months before spending on other items. So even if the housing recovery were to start crumbling today, retailers still could enjoy boosted numbers for months down the road.

Stores like Home Depot or Lowe’s (NYSE:LOW[14]) might prove to be good plays even if the real estate market flattens out. In an up market, those companies will see gains as homeowners improve their newly bought houses. But even if the recovery drops off, homeowners might spend the money to make their homes more marketable … or if they’re resigned to sticking around, to improve their own situation.

Which Business Is Right for You?

Each of these plays has different upsides and risks, but simply put: If you think housing is in full recovery, go for a direct play in homebuilders or the data providers. And if you’re skeptical about the continued recovery, retailers provide the chance for growth without as much dependence on a full-bull real estate market.

As of this writing, Adam Benjamin did not hold a position in any of the aforementioned securities.

Endnotes:
  1. faster than expected: http://www.bloomberg.com/news/2013-04-29/pending-sales-of-existing-homes-in-u-s-climbed-1-5-in-march.html
  2. consumer confidence: http://www.bloomberg.com/news/2013-04-30/consumer-confidence-in-u-s-rose-more-than-forecast-in-april.html
  3. home prices are on the rise: http://slant.investorplace.com/2013/05/may-holds-even-more-signs-housing-is-red-hot/
  4. drop in homebuilder confidence: http://www.bloomberg.com/news/2013-04-15/homebuilder-confidence-in-u-s-unexpectedly-dropped-in-april.html
  5. TOL: http://studio-5.financialcontent.com/investplace/quote?Symbol=TOL
  6. RYL: http://studio-5.financialcontent.com/investplace/quote?Symbol=RYL
  7. PHM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PHM
  8. Z: http://studio-5.financialcontent.com/investplace/quote?Symbol=Z
  9. TRLA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TRLA
  10. unusually good job monetizing traffic: http://www.forbes.com/sites/tomtaulli/2012/11/19/trulia-heres-how-to-monetize-mobile/
  11. WSM: http://studio-5.financialcontent.com/investplace/quote?Symbol=WSM
  12. FBHS: http://studio-5.financialcontent.com/investplace/quote?Symbol=FBHS
  13. HD: http://studio-5.financialcontent.com/investplace/quote?Symbol=HD
  14. LOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=LOW

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