The housing market is finally showing signs of life. Which opens up a range of long-term investment opportunities for your money.
One of the worst performing sectors of the S&P 500 since 2008, has been one of the best performing this year. It seems time was the only thing holding back the housing market. The companies that made it through the downturn were forced to cut costs, streamline, and are stronger for it.
The reality is, the housing market plays a huge role in the U.S. economy and has been a big drag so far. But that’s what happens when a bubble bursts. Housing prices plummet and new constructions grind to a halt. This affects material suppliers, manufacturing, retailers, and banks. All of which are potential long-term investments.
An improving housing market will just add fuel to the economy. New homes have to be livable. New home owners will accessorize. That means buying new grills, furniture, lawn care, window treatments, appliances, bedding, carpets, paint, and any other improvements that make a house…a home. That’s money being put back into local economies boosting things further.
There still are investment opportunities in the housing market. It may be over bought at the moment but we’re still in the early stages of this long-term growth story.
The home builders have been the investment of the year for 2012. It’s not a surprise really since I covered it in my predictions for the year. A word of caution though, most of these stocks in particular are priced on economic data not their fundamentals. With big runs there is usually a cooling off period and a better time to buy. You just have to be patient in this case.
Home Builder ETFs
If you believe in the housing market recovery, ETFs are the easy investment. Or you could use them for stock ideas too:
- SPDR S&P Homebuilders (XHB)
- iShares Dow Jones US Home Construction ETF (ITB)
Home Builder Stocks
- DR Horton (DHI)
- Lennar (LEN)
- KB Homes (KBH)
- PulteGroup (PHM)
- NVR Inc. (NVR)
- Ryland Group (RYL)
- Toll Brothers (TOL)
- MDC Holdings (MDC)
These companies will benefit from an increase in new construction as well as basic home improvements. This is mostly a manufacturing story, with a few exceptions in retail.
Similar to the home builder ETFs, if you believe in the housing market turnaround, ETFs are an easy choice and full of stock ideas too:
- iShares Dow Jones US Home Construction ETF (ITB)
- PowerShares Dynamic Building and Construction ETF (PKB)
Notice that the iShares US Home Construction is in this list also and is probably a better representation of the housing sector as a whole.
- Owens Corning (OC) – manufactures products that go into roofing shingles, windows, pipes and insulation.
- Fortune Brands (FBHS) – manufactures cabinetry, plumbing fixtures, windows, and doors.
- Mohawk (MHK) – manufactures carpets, tiles, hardwood floors and rugs.
- Masco (MAS) – manufactures cabinets, plumbing fixtures, windows, doors, basically anything needed to finish a house.
- USG Corp. (USG) – maker of gypsum products. The drywall, insulation and sheetrock needed to finish walls and ceilings.
- Whirlpool (WHR) – manufactures appliances.
- Lennox (LII) – makes heating and air conditioning units.
- Berkshire Hathaway (BRK-B) – a holding company with a portion of its business in the housing sector.
- Leucadia National (LUK) – a smaller holding company with business in the housing sector and a 50/50 loan servicing joint venture with Berkshire.
- Home Depot (HD) – the single biggest home improvement retailer in the country.
- Lowe’s (LOW) – #2 in the retail home improvement market.
- Sherwin-Williams (SHW) – paint manufacturer and retailer.
Rumors says many people are buying houses for cash. That sounds great but I doubt it’s the norm. Most home buyers will need a mortgage. With mortgage rates at all time lows, refinancing comes into play also. The big three banks in no particular order are:
- Wells Fargo (WFC)
- J.P. Morgan (JPM)
- Bank of America (BAC)
Regional banks will also play a role in the housing recovery and are entirely tied to the U.S. economy. Focus on banks doing business in markets that have seen an increase in housing prices.
For those looking for more diversity into the banks, these ETFs fill that need.
- Financial Select Sector SPDR (XLF)
- SPDR S&P Bank ETF (KBE)
- SPDR S&P Regional Bank ETF (KRE)
A Real estate investment trust can cover a wide range of the housing market. But the focus should be on building material suppliers and the lumber REITs. These will be directly affected by an increase in new constructions:
- Weyerhouser (WY)
- Louisiana-Pacific (LPX)
- Plum Creek Timber (PCL)
- Potlatch (PCH)
As home sales start to accelerate, home accessory sales will increase. New home owners will want to update, beautify, and secure their homes. This means lawn equipment, plants, security systems, gardens, furniture and anything folks use to get the best lawn on the block.
The two big retailers, Home Depot and Loew’s will get a boost in this area. So will these companies:
- Scotts Miracle-Grow (SMG) – Scotts is the leader in lawn and garden care products.
- ADT by way of Tyco (TYC) – ADT is in the process of being spunoff from Tyco. It’s expected to happen sometime in late September ’12. Demand for home security will increase and ADT is the largest North American home security service provider.
- Bassett Furniture (BSET) – involved in the furniture manufacturing and retail.
- Ethan Allen (ETH) – manufactures home furnishings, fixtures, everything needed to dress up a home.
If stocks and ETFs just don’t cut it, you could always buy real estate. It’s an easy way to invest in the market for the long-term. It’s the best way to invest in a new home. Especially if you plan on living in the same place for the next five or more years. Home prices and mortgage rates are at all time lows. It’s a buyers market and will be for some time.
Any aspiring real estate moguls should take notice. The rental market is heating up in parts of the country thanks to tighter credit requirements and limited supplies. This trend isn’t going to change any time soon either. Again, with mortgages and home prices at all time lows, now is the time to get started.
The Right Choice
Don’t expect a bust to boom return to the housing market like it was in the early 2000’s. Credit is tighter and will continue to be. It’s harder for people with suspect credit to get a mortgage. But rental construction is growing to fill the gap. This will be a long drawn out event over multiple years. With the housing market at an all time low, there is a long way to climb before construction and home sales return to normal. Any investors with the patience to wait until then, should be looking at opportunities now.
The best stocks and/or ETFs for your portfolio will depend on your current investment strategy. Do your due diligence before investing.