What’s Causing the Rebound in Housing Stocks?

Housing stocks like PulteGroup, D.R. Horton, and Toll Brothers are turning around following strong housing data.

Jan 6, 2014 at 2:45PM

For quite a while this year, homebuilders were some of the best-performing stocks in the market. Renewed strength in the US housing market, as well as favorable prices and mortgage rates, helped boost the top and bottom lines of the broader industry.

However, the rally was interrupted by a fairly stiff correction, largely related to rising interest rates that erased much of the homebuilders' share-price gains. Now, momentum seems to be heading up again for stocks like PulteGroup (NYSE:PHM), D.R. Horton (NYSE:DHI), and Toll Brothers (NYSE:TOL). Let's see what's moving the sector at the moment.

Strong housing figures
Some of the rebound in housing stocks can be related to the most recent housing-market figures released by the Federal Housing Finance Agency and the Commerce Department. According to the reports, US house prices rose 0.5% between September and October. Year over year, prices were up some 8.2%, which was largely in line with the consensus estimate as compiled by Bloomberg.

According to experts, the rising market owes largely to a relatively low supply of new homes, coupled with a slowly improving employment picture. Some believe that the market is entering a period of normalization, where investors are moving out and traditional buyers are moving back in. Also, the increase in prices seems to be leveling out. Geographically, the best-performing states for the month were Colorado, Arizona, California, and Oregon, with prices rising around 1%.

For November, the picture is a bit more mixed. While the month's 464,000 new sales for single-family houses beat the 433,000 analyst consensus, those sales were down around 2.1% from the revised October count. Still, things don't look too bad at all, with November sales up 16.6% year over year, and October sales up 17.6%. In any case, analysts seem comfortable with the numbers.

Stocks on the move
Predictably, these robust figures have boosted housing stocks. Shares of companies like D.R. Horton, PulteGroup, and Toll Brothers all posted solid gains following the news. After a tough time since May, during which rising mortgage rates and a dramatic increase in home prices deterred potential buyers, things seem to be looking up again.

In any case, analysts are forecasting some pretty huge earnings growth. PulteGroup is expected to grow earnings by a whopping 882% for the year. Historically, the company has bounced back from some very dark days indeed, bending an annual loss of $9.02 per share in 2007 to a profit of $0.73 per share last year.

Toll Brothers isn't doing too badly, either, expecting a 41% earnings-per-share increase for 2014. Furthermore, the company has a very strong land position, which has allowed it to capitalize more easily on the surging housing market.

D.R. Horton hasn't been doing quite as well, according to Zacks, missing its estimates for the top and bottom lines. Still, the company's full-year 2013 performance was quite impressive. Pretax income increased by 171%, on a 19% net sales order increase. Gross margin was up 310 basis points for the year, reaching 20.8%. Finally, the number of homes closed was up around 28%.

In terms of valuations, forward numbers may be the way to go, as it has been a choppy trailing twelve months for homebuilders. D.R. Horton is by far the cheapest, trading at 11.33 times forward earnings, followed by Toll Brothers' 16 and PulteGroup's 17.6. While the latter two are a bit high, they are not outrageously so. Price-to-sales paints the same picture, with D.R. Horton the cheapest at only 1.13 times sales. 

The bottom line
The recovery in the US housing market still has a fair bit of traction, as a tight supply and an improving jobs picture are boosting sales. The news has signaled something of a turnaround in homebuilder stocks, which have received a beating since May. Strong housing figures, combined with reasonable valuations, could propel housing stocks a lot higher in the coming year. However, investors should be wary of a potential bubble forming, despite a slowdown in home prices.

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Daniel James has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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