A Small Tech Stock With Huge Real-Estate Upside

The residential real-estate market has been recovering for the past couple of years, but it remains volatile. Investing in homebuilders and lenders isn't necessarily of interest to many, because of fears of another crash. And while these fears are (mostly) unwarranted, there are other ways to invest in residential real estate and get a slice of the rewards.

The bottom line is that people have to live somewhere. There are a few companies working to connect anyone looking for a home -- whether they're buying or renting -- with sellers, rental agents, realtors, seller-owners, and even lenders. Let's take a closer look at the opportunities they present.

Housing demand should grow stronger
Almost a year ago, The Motley Fool's Morgan Housel described how housing could be the "coming boom." From the article:

From 2002 to 2007, a net average of 1.3 million American households were created every year. During that time, almost 2 million new homes were built annually. Today, it's the other way around. In the last year, 1.1 million new households were formed; but, just 700,000 new homes were built. ... Harvard's Joint Center for Housing Studies estimates that household formation will average 1.5 million from 2010 to 2020. Factor in scrappage, and new home construction needs to more than double from current levels to meet those projections.

Here's a closer look at the historical data:

US Housing Starts Chart

US Housing Starts data by YCharts.

New housing starts are on pace to be around 1 million this year, meaning there's still a lot of room for housing to grow. The catch, of course, is bank-owned properties from the explosion of foreclosures over the recession. The good news is that foreclosures are approaching a more "normal" level, partly aided by increasing home prices helping some homeowners refinance into today's low rates:

US Consumers with New Foreclosure Chart

US Consumers with New Foreclosure data by YCharts.

Estimates vary widely on how many homes banks still own, but it's easy to assume that the number is in the millions. And as banks slowly put these properties up for sale, homebuilders will have to nearly double output just to keep up with, as Housel described, the growing number of new households formed. But even if housing starts don't pick up...

People have to live somewhere
Which is where Zillow  (NASDAQ: Z  )  comes in. The company is working hard to become the No. 1 Internet destination for those looking for a home and for those looking to help someone find a home, whether they're buying or renting. And while the stock is still up more than 125% from its 2011 IPO, it has fallen 20% from its peak of last month on fears that rising interest rates will put further pressure on home sales, not to mention concerns about Zillow's ability to establish itself as the Web portal for home shoppers. Add in the shift from profitability to losses as management spends heavily to grow the business, and investors have plenty of reasons to be concerned.

And while it's important in successful investing to look at the risks, don't ignore some of the real advantages that Zillow offers, including the growing strength of its network effect as it expands its offerings and draws a larger audience. Zillow already draws nearly double the monthly visitors of closest competitor Trulia  (NYSE: TRLA  ) . There's more: Per Alexa.com, Zillow visitors, on average, stay 15% longer and view almost twice as many pages as Trulia visitors, indicating a higher level of engagement -- something advertising partners value. And to date, more traffic and higher engagement have led to stronger revenue growth versus Trulia:

Z Revenue TTM Chart

Z Revenue TTM data by YCharts.

If this indicates that management's investment in growing its customer base is paying off, then the initiative could make for a rewarding long-term return.

But homebuilding is still a massive opportunity
And one way to invest in this is through two ETFs that offer exposure to multiple homebuilders while also diversifying into ancillary businesses. One is iShares U.S. Home Construction ETF  (NYSEMKT: ITB  ) , which is heavily weighted (about 84%) to homebuilders and building-materials companies. Another is SPDR S&P Homebuilders ETF (NYSEMKT: XHB  ) , which, despite its name, is only about 54% weighted to homebuilders and building-materials companies, with the remaining mix diversified into home furnishings makers, retailers, appliance makers, and home improvement retailers.

Final thoughts
While both  ETFs are still well off their highs from the 2007 market peak, they have handily outperformed the market since the bottom in 2009. And with housing starts and new family formations both set to continue to grow well into the future, both deserve a hard look. As to Zillow and Trulia, Zillow's big lead may not be insurmountable. And all we have to do is look to the success of both Google and Facebook to see how successful a Web-based portal can be at drawing both visitors and advertisers if it offers something worthwhile. Zillow looks to be the better bet today, but there could be room for two winners.

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