The Case for Homebuilder Stocks in 2014

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homebuilder stocks

A cold winter may be partially to blame for fewer new homes being built in January. But the prospects for homebuilders remain bright as we look forward to the rest of 2014.

New housing starts are currently 41% below their historical norm. If new home building continues to recover, that will help boost shares of U.S. homebuilder stocks.

The SPDR S&P Homebuilders ETF ( XHB ) has been a strong performer, rising 66% over the last two years. But even after that rise, the homebuilders index trades at about 17 times last year's earnings. That's just a slight premium to the S&P 500 index.

If you share my view that new home construction will continue to rebound with the American economy, homebuilder stocks are a great place to be invested. You could simply buy the SPDR S&P Homebuilders ETF… or you could consider buying a single homebuilder stock that caters to the wealthiest Americans.

But before I tell you more about that stock, let's examine what's happening in the housing market. Housing starts had a hiccup in January. The Commerce Department reported last week that U.S. housing starts - a measure of new homes being built - fell 16% in January. That equals a seasonally adjusted rate of 880,000 units.

The number of new homes being built today has recovered from the lows of 2009 and 2010. But it remains far below the historical norm. Since 1959, an average of 1.5 million new homes have been built per year. That number runs slightly above the number of new households being formed.

But since 2007, the number of new homes being built in the U.S. has been below that long-term average. The reason is that during the housing boom, builders were bullish and building far more homes than the market would support. The chart below tells the whole story.

homebuilder-stocks

Source: U.S. Census Bureau

The U.S. housing market is still healing from the housing boom and bust. But you can see that new housing starts are already recovering nicely.

More good news: Existing home prices are rising, too. In the last quarter of 2013, home prices nationwide rose 11.3%, according to the Case-Shiller Index. That was the highest quarterly gain since 2005.

Those home price gains may slow in 2014 due to rising interest rates. The combination of rising prices and higher mortgage rates is making homes less affordable for those on the fringe.

But for wealthy Americans, houses remain quite affordable. Even though interest rates are up since last May, they remain near historical lows.

In my $100k Portfolio , I've been recommending just one housing stock. This company builds McMansions and sells homes to a very affluent customer base.

Earlier this week, the company reported strong quarterly earnings. The number of homes sold increased by 24%. Meanwhile, the average selling price of a home was nearly $700,000. That average price was a 22% increase over the last year!

How many businesses do you know that can raise their prices so much? The likely answer is very few. But if you're selling expensive homes to the wealthiest Americans, apparently you can raise prices significantly.

Those results helped contribute to a 52% increase in revenues for this housing stock. Meanwhile, the company's profit increased ten-fold.

Subscribers to my $100k Portfolio have already captured nearly 50% profits from this housing stock. But I think that there is lots of upside from here.  That's why I included this stock on my Conviction Buy List in the February issue of the $100k Portfolio .

I would love to send you the latest issue of my investment newsletter, where you'll get all the details on this leading high-end homebuilder. Just click here to claim your issue today .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs , Real Estate

Referenced Stocks: XHB

Wyatt Investment Research

Wyatt Investment Research

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