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  1. Home
  2. / Investing
  3. / Economic Data

Why Housing Is Still Good and How to Play It

Housing starts are still too low to meet the coming demand.  
By MIKE NORMAN Aug 19, 2014 | 02:00 PM EDT
Stocks quotes in this article: PHM, TOL, KBH, LEN, DHI, BZH, HOV

Housing prices have climbed back appreciably from the lows of the housing crash. The Case-Shiller 20-City Home Price Index shows that about half of the price losses have been recovered since 2009.

In markets such as New York City and Miami, prices are making all-time highs. The housing bears who supposedly "called the crash" have totally missed the boat on the recovery. They also missed the boat on stocks and the general economy, but that's a whole other story.

I have written several times here that housing prices will continue to climb, simply because housing starts remain way below their historical 40-year average. Over the past 40 years, this nation has averaged 1.5 million new single-family housing units annually. However, six years after the housing collapse, we are still way below that average, at a current rate of just over 1 million units. That level of construction is still far below what is necessary to replace and restock the current U.S. housing stock.

In normal times and at the normal rate of new home construction, it takes about 75 years to entirely turn over the nation's housing stock. At the current rate, it would take about 112 years to do the same, and not too long ago the level of housing starts was so low that it would have taken 225 years to turn over the housing stock. We've made some improvement, but we have farther to go.

This has important ramifications. First of all, a growing percentage of the nation's housing supply will fall into permanent disrepair and become dilapidated and unlivable. More of our communities will become blighted, and that will lead to greater social problems and inequality. Second, it will mean that the housing supply will not keep pace with the rate of population growth and family formation.

Leaving the social ramifications aside, the price of housing is clearly set to rise for the long term with hardly any interruption, because supply will fail to meet demand. Admittedly, price appreciation will be uneven in terms of both the type of units and location, and the primary factor there will be income. In affluent areas, I see prices rising on an uninterrupted basis, whereas in less affluent or poor areas, prices may stagnate for years to come as incomes remain insufficient to bolster demand.

In the "middle ground" income-wise, I see potential, and a great way to play that potential is with a company such as Pulte Group (PHM).

I like Pulte Group because it looks extremely cheap at just under $19 per share, it has a price-to-earnings ratio under 3.0, and it pays a 1.0% dividend. Compare that with Toll Brothers (TOL), which has a P/E of 25, no dividend and about 2.5 times more debt at least, when compared to its cash on hand.

Granted, Toll Brothers builds and markets to mostly affluent home-buyers whose incomes have not been negatively affected as perhaps some of Pulte Group's customers. However, Pulte's numbers are clearly more attractive, and its market segment may finally be starting to see income gains. It is poised for an advance, I believe.

Other homebuilder names that have varying degrees of attractiveness are D.R. Horton (DHI), Beazer Homes (BZH), Lennar (LEN), Hovnanian (HOV) and KB Home (KBH) in no particular order. However, I like Pulte the best out of the group.

As of this morning's data from the U.S. Census Bureau and Department of Housing and Urban Development, housing starts are at an eight-month high, and we still have a long way to go. This tells us that homebuilders will continue to be busy and will be good investments.

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At the time of publication, Norman owned Lennar, and he plans to buy Pulte on any dip.

TAGS: Investing | U.S. Equity | Economic Data

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