Feel free to click your heels together and utter the phrase "there's no place like home" because the nightmare that was the housing bubble is firmly in the rearview mirror.

Source: Great Valley Center, Flickr.

A lot of credit must be given to the homebuilders who have tightly controlled inventory despite home prices that are up significantly from their lows. However, the bulk of the credit is likely to go to the Federal Reserve, which set a friendly monetary policy that kept lending rates at historically low levels for years, encouraging first-time homebuyers and investors to step up to the plate.

The end result has been a 12.8% jump in home prices from August 2012 to August 2013, according to the latest Case-Shiller 20-City Index.

Five states where home prices are soaring
Not only are these rising prices good for homebuyers, because at one time we saw more than one-quarter of mortgages underwater, but they continue to fuel opportunity for the homebuilding sector... if the homebuilder hits the right price points and is operating in a hot region, that is! Here at five states that, according to Barchart's Housing Price Index, are seeing housing prices grow faster than anywhere else in the U.S. Which homebuilders could be poised to take advantage of this recent price surge?

Here are the five states where home prices are rising the fastest: 


Average Year-Over-Year Home Price Increase







North Dakota




Source: Barchart.

Obviously, there's a blatant observation to make right off the bat: States that were hit hardest during the housing bubble -- Nevada, Arizona, California, and Florida -- have also been the quickest to rebound. This could very well lead to some emotional overreaction by homebuyers to the upside, but it really shouldn't come as a surprise that these four states are among the top five in home price appreciation.

As for North Dakota, I can only surmise that it's seeing a sizable increase in home prices due to the oil industry boom in that region. With little in the way of available housing in the state, it appears that low supply and high demand are vaulting home prices higher.

Another overlooked factor in this recent housing rally is that the count of investors as a percentage of buyers is creeping higher. The sheer number of all-cash investment purchases has been on the rise since the housing bubble hit, with data from DataQuick showing that all-cash transaction rose from roughly 13% of all transaction in 2007 to 33% of all transactions as of December 2011. You can attribute investors being more cautious with their purchases for the increased cash usage if you'd like, but I see it as all the more reason in many of these southwestern states for prices to be chugging higher.

Source: Bakoko, Flickr.

Which homebuilders will benefit?
I doubt you'll find a homebuilder that would benefit from the above statistics more than Lennar (LEN -0.46%). Lennar is already leading the sector in homebuilding margin at 24.9%, and its focus is primarily on water-bordering or warmer climate states. Lennar builds homes in Arizona, Nevada, California, Washington (which exhibited nearly 6% year-over-year growth), as well as Florida and a number of other states in the Southeast and Chesapeake Bay regions. These regions allowed Lennar to deliver a 12.8% increase in average sales price of homes during its third quarter, to $291,000 from $258,000. As long as these states continue to see prices rise above the national average, Lennar will have little trouble boosting its margin.

Another name to remember would be the nation's largest homebuilder, D.R. Horton (DHI -0.21%) which sort of wins by default since it has much of the country blanketed with its communities. Like Lennar, D.R. Horton offers homes for sales in the majority of coastal and warmer states, and is really only missing a presence in the Northeast and north-central Midwest (including North Dakota). For the third quarter, D.R. Horton reported a 340-basis-point, year-over-year increase in homebuilding gross margin to 21.4%, while its average home sale price increased by 15% to $268,000. Obviously a cheaper home has more room to the upside, but this report was equally as exciting as Lennar's.

Finally, if you want a company with a bit more risk and reward potential, I'd consider looking into MDC Holdings (MDC -0.02%) which, not to sound like a broken record here, operates out of Nevada, Arizona, California, and Florida as well, in addition to a few other large metro areas around the country. MDC has been relatively conservative with its home construction efforts since the recession, choosing instead to gobble up land and wait for the right time to build. MDC's gross homebuilding margin was 18.1% in the third quarter (which is actually a disappointment since it was flat from the sequential quarter), while average home sale prices jumped 12% to $345,000. With MDC you're going to get a higher price point home which will make it a bit more vulnerable if home sales begin to taper off; but you also get a trustworthy management team that understands how to manage inventory and does what it can to improve shareholder returns through dividends.

Stay tuned for a look later in the week at the five worst states for home price performance over the past year.