A recent Associated Press assessment of the residential real estate market concluded the market's prospects were strong. In support of this argument, the article noted that sales of existing homes climbed 5.1% last month to a seasonally adjusted annual rate of 5.35 million, the third consecutive month of 5 million-plus home sales, and that median home prices rose nearly 8% in the past year to $228,700, within $2,000 of the July 2006 peak.
In addition, first-time buyers are now more involved in the market than they have been in some time. A year ago, about 27% of homes sold went to first-time buyers, while in May, these buyers grabbed 32%. That is an improvement, though admittedly this participation rate still falls behind the 40% share first-time buyers have had historically.
Helping to boost home sales is a resurgent employment market, with 3.1 million workers added in the past year, a period when the unemployment rate dropped from 6.3% to 5.5%. Another plus for the housing market is low mortgage rates; 30-year fixed rates are about 4%.
If you are still skeptical about the housing market's strength, consider this: 28% of homes are selling within two weeks, compared with 19% prior to the recession.
Last month I wrote about the housing market and am writing again because another company in the market is now worth your consideration: Builders FirstSource (BLDR). The company supplies structural building materials and services to homebuilders through a chain of 56 distribution centers and 56 manufacturing facilities in nine states. (Builders FirstSource is part of TheStreet's Stocks Under $10 portfolio.)
To judge companies worthy of recommending, I use automated strategies created to mirror how well-known investors decide what to buy. The strategy I modeled on James O'Shaughnessy's writings is a fan of Builders FirstSource. It likes the company's large market cap ($1.35 billion), earnings per share that have increased in each of the past five years, and a price-to-sales ratio of 0.83, well below the 1.5 maximum allowed. Companies that pass these three tests are then put through one last test, namely relative strength, which is a measure of how a stock has performed in the past 12 months relative to the overall market. Only the top 50 companies earn the strategy's highest marks, and Builders FirstSource's relative strength of 94 places it in this top-50 group.
If you are a believer in the power of the residential housing construction market, pay attention to Builders FirstSource. It is nicely positioned to ride on the market's strength, and its stock price is reasonable, too.