Two phrases that haven't often gone together lately, "confident" and "real estate market," found common ground yesterday in the National Association of Homebuilders' (NAHB) Housing Market Index. This index measures builder confidence about housing market conditions and has been on a five-month streak that leaves many investors wondering whether real estate could now be a safe bet.
But behind the sugar-coated thumbs-up lie some warning signs that investors shouldn't ignore. Here's everything you need to know, and five companies that stand to win big or get into trouble as the real estate market stretches its newfound muscles.
The NAHB Housing Market Index surveys homebuilders for their opinion on current and expected sales of single-family homes. "Expected" has a six-month time horizon, and builders are also asked to rate the level of traffic of prospective buyers. There are a few key numbers you need to know to put this report into perspective.
- 2006: The last time the NAHB index was measured at 40 or above.
- 40: The actual index score for this month. Although this represents yet another jump in positive perception, its sub-50 rating still means that more builders consider their market outlook as "poor" rather than "good."
- 502,000: The most recent data on new single-family household starts, from July. This number is not forward-looking and is very similar to new home-start numbers we've been seeing from 2009 onward.
Real estate rocketeers
For all the fear and anxiety that wracked the real estate market just a few years ago, investors have been more than willing to jump in bed with housing stocks in the past year. Check out the performance of these five companies and funds to see just how far they've come.
Z data by YCharts
PulteGroup (NYSE: PHM ) is the shining star of the bunch, more than doubling in value in less than a year's time. After sales fell 9.5% in 2011, this homebuilder pulled in 12% sales growth in 2012. In its most recent quarterly earnings report, PulteGroup cited gross margins of 20%. High margins are an especially good sign in the current market, where NAHB Chief Economist David Crowe cites the rising cost of building materials as a major concern for future home sales.
For those looking for easy diversity in their investment strategy, grabbing ETFs such as iShares Dow Jones U.S. Home Construction Index (NYSE: ITB ) or SPDR S&P Homebuilders Index (NYSE: XHB ) is a simple way to get in on a hunch without picking sides. The S&P Homebuilders ETF has doubled in the past year, while the Dow Jones index has risen an admirable 75%.
Home Depot (NYSE: HD ) squeaks in just behind the ETFs, with 72% gains in the past 12 months. Unlike PulteGroup and other home construction companies and ETFs, Home Depot specializes in more generalized home improvement. If the disrepair of the Capitol in Washington is any indicator, home repair is one of the first things to go ignored during hard economic times. From its 2010 revenue slump to $66 billion, Home Depot has worked its way back to $70 billion in sales and increased net profit by 50%.
The newest addition, online tech company Zillow (Nasdaq: Z ) , has carved out a niche for itself in the real estate advertising business. The company is attempting to re-create the real estate marketplace, leveling the playing field for consumers and providing a new medium for brokers and mortgage lenders to reach clients. After a successful 2011 IPO of $20, Zillow announced earlier this month that it's proposing a secondary offering to raise more funds for its big ideas. The stock is currently at $43 and is up nearly 50% in the past year. Zillow will face increased competition from newcomers but has big plans for the $6 billion real estate advertising market.
Good times ... are here to stay?
Homebuilder confidence is up, and real estate stocks are at all time-highs. Sound familiar? The same sentence was probably uttered a thousand times by disbelieving investors as they saw their shares plummet during the Great Recession.
But like the Smithsonian Zoo's surprise baby panda, there's reason to be happy about this newest report. Cautious consumerism means that this growth is probably more organic than the pre-recession boom. Similarly, corporations are making increasingly strategic decisions and are less likely to take housing risks that would've seemed silly to pass up in 2007.
The recent large gains in this sector will undoubtedly scare many investors off as they anxiously await the next bubble, but remember that there are no laws of gravity in the investing world. What goes up doesn't have to come down, and now could still be an excellent time to invest in the real estate recovery.
As the housing market picks up, other sectors are also poised to make massive gains. To help you cash in on the economic recovery, The Motley Fool has prepared a special free report, "Three ETFs Set to Soar During the Recovery," covering everything from emerging markets to energy. Diversifying your housing bets with these complimentary funds could help to create balanced steady returns for years to come. But hurry: It's available for a limited time only, so grab your free copy today.