Is It Time to Buy Homebuilders Again?http://www.fool.com/investing/general/2013/11/22/is-it-time-to-buy-homebuilders-again.aspx Rupert Hargreaves
November 22, 2013
Higher mortgage rates, combined with rising home prices, have helped slow the housing market during the last few months. Home affordability dropped to a five-year low during August, and new home purchases dropped 1.9% from the previous month. Unfortunately, after several strong months, the United States' housing market has now hit a plateau.
Housing stocks have mirrored the market's weakness. Indeed, the SPDR S&P Homebuilders ETF is down 10% from its highs earlier this year. In addition, PulteGroup (NYSE: PHM), the nation's biggest homebuilder, is down around 30% from its May high, and Lennar Corp (NYSE: LEN) is down 25% from its May high.
However, there is some evidence to suggest that this could be a great long-term buying opportunity.
Slow and steady wins the race?
What's more, the CEPR reports that if home price growth had continued at this rate for much longer, prices would have been pushed back into bubble territory. That's not good for the long-term economic health of the housing market .
Nonetheless, this evidence indicates that the slowing housing market could actually be a good thing, leading to a slower but more robust recovery.
With the homebuilders now falling back to year-to-date lows, investors are also being offered an interesting opportunity. In particular, homebuilders are now trading at more attractive multiples than they were earlier this year, when a surge of investor cash into the sector sent multiples to five-year highs. Pulte Group for example, now trades at a more respectable forward earnings multiple of 14.4, compared to the multiple of 20.5 reported during May.
But where should you look for deals?
However, I want to look at a different metric: operational gearing. This number describes the relationship between a firm's fixed and variable costs; higher fixed costs mean higher operational gearing.
Why use this metric? Well, high gearing makes a firm highly sensitive to a change in sales, which can happen quickly in the housing market. So we're looking for the company with the lowest level of operational gearing, since companies with high operational gearing are usually forced to make sudden, deep cost cuts when sales start falling.