Which home builder stocks would you buy right now?
Another sector that has taken a pounding - along with anything else connected to the Real Estate market - is now the time to buy? If so, where should we be looking?
Best Answer
1786 points
ChaosNantuko answered 11 months ago …
RYL is showing a triple bottom. I'm looking at RYL as a potential buy if it breaks resistance at 29 for a move up to around 38-39. To confirm the signal, wait for it to hit 30, and set a stop loss at 28. Unlike many home builders, RYL has been trading sideways between 20 and 28 since October, so its been showing some signs of strength, relative to the sector. From what i've seen, it has the best technicals in the home building sector.
From a fundamental point of view, its lost about 4$ a share in assets from the real estate problems so far, assuming it posts another quarterly loss of 2$, that puts its total losses due to the problem at 6$ per share. That represents a change in book value per share from around 35 to 29 when all is said and done. Thats less about one sixth. Yet the companies shares have fallen from around 55 to around 25. Their earnings before the problems in the market were around $8 per share annually. Once the problems are gone, they should be able to make at least 5-6 dollars per share annually. With a price to earnings ratio of 12, that would put their stock price at between 60 and 70, making it a good long term investment as well.
Answers
2703 points
MNSL answered 11 months ago …
I will not buy any home builder stocks now. Still credit bubble is there. Cost of building materials have gone up. You can’t expect good profit margin and growth at least for next 03 years. Still there is a time to bottom out. We must enter into this sector only after doing research carefully. Further some builders will have advantage over others once they become bankrupt or lose their market share.
Read more from MNSL flag as abuse great answer
3127 points
EthanR answered 11 months ago …
First, I want to say that the analysis provided by Chaos Nantuko is excellent, and very accurate. MNSL also makes a good point that it might still be early to buy. However, always remember that Wall Street looks ahead six months. So the homebuilder stocks are right now reflecting Wall Street's view of July, 2008.
I took six well known homebuilder stocks and ran a simple three month comparative chart on them to assess recent performance and relative strength. The six stocks were RYL, CTX, TOL, KBH, DHI, and LEN. Over the last three months, all six have lost money, but RYL has lost the least. These are all approximate, not exact figures:
STOCK Minus
RYL (11%)
DHI (23%)
TOL (30%)
CTX (30%)
KBH (40%)
LEN (42%)
I then ran the same chart for the past one month, so as to assess the most recent performance of each, and see if anything has changed. Again, all six stocks were lower, indicating that the bearish trend may not be over. The results were:
Stock Minus
RYL (4%)
CTX (11%)
LEN (15%)
DHI (16%)
KBH ( 17%)
TOL (22%)
KBH (17%)
LEN (42%)
The results seem to indicate that Chaos Nantuko is correct in his selection of RYL as being the best of a bad lot. It had the best relative strength of the group over the past 3 months and 1 month. In fact, even if you go back 6 months, it was tied (with TOL) for the best performance of the group. So obviously, RYL is the horse to back, and I agree with the assessment that 29 breaks resistance.
If you want to be more daring and buy it at current level of 23.83, you can do so, but you must absolutely put a stop in below 20, and that is 16% lower, so kind of a big loss to take. RYL has had three consecutive up days, on decent volume. That's a good sign. It is not yet "overbought" , but if it pulls back say 3-4%, you could enter a position there, put in your stop order below 20, and the risk would be a little lower.
Remember, investing is always a balance between risk and reward. The greater the risk (buying RYL at 23.83 vs above 29), the greater the reward (an additional $6 of profit per share if it does go higher). Another way to reduce the risk would be to buy a Homebuilder ETF, such as XHB or ITB, rather than one indivicual company. Whichever road you choose, best of luck!
1130 points
sundarkambam answered 11 months ago …
I will answer this question differently.
Instead of looking at companies I will look at the real estate market and ask myself "How to Spot Undervalued and Overvalued Real Estate Markets - and Profit From the Difference ?" ,I will then identify the companies which operate in those markets and see whether they are worth buying.
Now on to the article which tries to answer this question.
The link is : http://www.earlytorise.com/2007/12/11/how-to-spot-undervalued-and-overvalued-real-estate-markets.html
Even Kids Can Identify a Bubble
Public companies typically sell for about one times sales and 15 times earnings. You might pay 30 to 40 percent more or less, depending on the industry, the company, how fast it’s growing, and where you are in the economic cycle. Yet, eight years ago, we had hundreds of companies sell for dozens, even hundreds of times sales… and hundreds and thousands of times earnings. Many of the fastest rising stocks, in fact, had negative earnings!
And behind it all, savings were falling while personal and corporate debt was skyrocketing. Cheap money was chasing tech and spec stocks, and pushing prices far beyond the economic fundamentals of sales and earnings.
That was a bubble. Stock prices no longer had any fundamental connection to sales or earnings.
In residential real estate, it’s even easier to identify a bubble. One big telltale sign is that homeowners can no longer afford to buy their own homes.
I know a mechanic, for instance, who bought his home for $150,000 10 years ago. Today, it’s worth $500,000. His house has gone up by 233 percent, yet his income is up only about 40 percent. He could not afford to buy the same house today.
In fact, even if he sold his house and went to buy another house for the same $500,000, he’d still have a tough time doing it because his new taxes and insurance would be based on $500,000 instead of being anchored to $150,000.
My friend is no longer a potential buyer for the same kind of home he bought 10 years ago. And most of his longtime neighbors are in the same boat.
Fact is, large groups of people are being priced out of their own neighborhoods. If, for example, you’re trying to sell a typical median-priced home in Los Angeles today, your market of potential buyers is 90 percent smaller than it was six years ago. In 2001, one out of every 2.4 households was a potential buyer for your home. Today, only 1 in 33 is.
You didn’t have to be a genius or have a crystal ball or wait till "after the bubble burst" to recognize that bubble. When the median-priced home is not even remotely affordable to the median-income household, something’s gotta give.
That something has been prices. And prices are likely to continue to give way in the bubble markets until properties or money or both become cheap enough that the median-priced home is once again affordable to people earning the median income.
Investors Can Get Priced Out of a Market Too
Another irrefutable sign of a bubble is when investors can’t find properties at prices that cash flow. When people pay $350,000 for triplexes that generate $25,000 a year in gross rents, they’re no longer "investing"… they’re speculating.
The rents are not enough to cover a traditional mortgage and expenses. The only reason people pay those prices is they expect someone else to come along and pay an even higher price. Why? Simply because… well, because that’s what’s been happening so far.
So you end up with a market where homeowners no longer provide buying support because they’ve been priced out. Investors no longer provide buying support because they’ve been priced out. And only a few last speculators, armed with self-detonating loans, push prices up the last few dollars until the cheap money stops. And "pop" goes the bubble!
The Flip Side of Bubble Markets: Great Opportunities in Value & Growth Markets
The same criteria used to identify bubble markets can be used to spot value markets. And to find strong investment opportunities, you only need to look for value markets that also are showing strong signs of growth.
First, let’s take a look at the value criteria…
For the last two years, I’ve had my research staff pull together data on over 130 U.S. metropolitan markets. I’ve used this research - plus travels throughout the U.S. - to identify value and growth markets.
I’ve formed limited partnerships and have invested in some of these markets myself. This has allowed us to continue to make significant profits even though many of my passive investors and I live in South Florida, perhaps the worst bubble market in the country.
For value, we consider how the typical house is priced relative to rents and relative to household income. Here are some examples:
In the U.S. right now, the typical house trades for about 21 times annual rents. That means if a house would rent out for $12,000 a year (or $1,000 a month), it’s selling for about 21 times that amount - or about $252,000. At these ratios, the rents won’t come close to covering your typical mortgage and expenses. In bubble markets, it’s even worse.
We’ve put together a Bubble Index that shows key value and growth criteria for some of the most overvalued markets - from Los Angeles to Miami to Boston. In these markets, the typical house sells for almost 29 times gross annual rents!
So, in most markets, to get cash flow in small residential properties, you have to (1) focus on special situations and find motivated sellers so you an buy deeply under value; (2) buy small multi-unit properties (2 to 4 units); (3) buy in a market outside your home area where properties do cash flow; or (4) some combination of these things.
Another key value criterion is the price of the typical house compared to the typical household income. Nationally, the median-priced home tends to sell for just over four times the median household income in the area. Historically, this is a little high, but still affordable. But not in the bubble markets…
In Los Angeles, the median-priced home is $586,500, while the median household income is just $56,200. That’s the kind of ridiculous situation that prices homeowners out of their own neighborhoods. In other words, at current prices there is almost no market for median-priced homes in LA.
By contrast, Houston has a higher median household income, at $60,900. And the median-priced home is just $148,600. That’s extremely affordable - which means you have a market for a home you’re selling in that city.
But don’t forget the growth factor. Value alone is not enough.
Growth Counts Too
If you just looked at value, you might conclude that Pittsburgh and Detroit are great buys right now. After all, their median-priced homes trade at only about two times household income and 10 and 13.6 times annual rent, respectively. Trouble is, their economies are struggling. Both these areas have had negative population growth in recent years. Pittsburgh has had anemic job growth and Detroit has been losing jobs as well as people.
So to look for the best investment opportunities, you want to look for value and growth. You also want to look at markets with diversified economies. They shouldn’t be overly dependent on one industry, as Detroit was with automobiles and Houston was with oil when they went through their major real estate crashes.
My favorite value and growth markets tend to have the following characteristics:
1. The median home is priced well relative to household income. (Typically three times or less.)
2. The median home is priced well relative to gross annual rents. (Typically 15 times or less.)
3. The market has experienced appreciation in the past few years, but at a sustainable pace, in line with the long-term average or slightly below it.
4. Population and jobs have been growing faster than the national average.
5. The economy is diversified. (One of my favorite markets has five strong sectors in the economy: a state capital, a major university, a tech corridor, music industry, and local industry.)
6. It has lively emerging or re-emerging downtown areas with a diversity of cultural activities.
Once you find your new target market, focus on buying undervalued, cash-flow properties in that market. Then fix your interest rate and make sure you have the right management in place.
Investing is a forward-looking process, and no one can claim to know the future. Yet you can get a pretty good look at the present. So don’t believe Alan Greenspan and bubble-boosting brokers. The fact is, yes, you can identify bubbles.
Likewise, you can identify value and growth markets. And when you consistently put your money to work in undervalued properties in these markets, you can make a fortune.
It ain’t rocket science. It’s common sense. But that’s a commodity that is rarer than cash flow in today’s marketplace.
3127 points
EthanR answered 11 months ago …
Sundarkambam, your bubble/value analysis is excellent, except for one missed component- that people will always pay higher real estate prices to live in certain locations, whether that is by the ocean, or in major cities like NYC, Boston, Los Angeles, or Miami. Ask 1000 people, "would you rather live in Houston or Los Angeles", and see what they say.
Another factor: The average home in Los Angeles is $586,500 because there are so many multimillion dollar mansions there, and that creates both a higher mean and median value for the area. Just because the average person makes $56,200 doesn't mean that they can't find a $200,000 home in that area. However, it is true that the quality of the home for that price may not be as good as you will find in Houston.
Here in Jacksonville, FL, where I live, the median salary is about $45,000. The median priced home is only $127,982, according to the site below: (I wouldn't have thought it's that low, but I will assume they are accurate)
http://www.homeinsight.com/home-value/FL/jacksonville.asp
Being in Florida, there is also no state income tax. So it sounds like a pretty great place to live! However, our prices continue to trend lower, so how can that be? And why is it that people would still rather move to Miami than here? Because it's not just about price. Home ownership also has to do with emotional variables and quality of life issues. And people will always pay more to live in areas that are perceived to be "hot spots".
But having said all of that, I am pleased to say that one can buy a rental home here for about $150,000 that can be rented for $1000 fairly easily (price= 15x rent). And if one buys a foreclosure or other type of distress sale, that same home can be found and rehabbed into shape for about $135,000.
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