America's housing industry seemed to stabilize in 2013. Record low interest rates, diminishing supply, and an improving economy all supported the industry's slow recovery. However, despite all of this, most of America's top housing stocks performed rather poorly. Before we look at top housing stocks for 2014, take a look at the following chart showing returns in 2013.
BZH Total Return Price data by YCharts.
Does that mean that top housing stocks are primed for a rebound in 2014? That all depends. Many analysts seem to be very cautious about housing in the year ahead, mainly because the end of easy mortgage money from the Fed is in sight.
However, there is compelling data suggesting that housing is building momentum and is poised for a big year in 2014. For example, sales of new homes jumped up 25% in October, making it the largest monthly increase in more than three decades. Further, inventory fell to a 4.9-month supply, which is a historically low level. Finally, as the following slide from a recent Hovnanian Enterprises (HOV 0.23%) investor presentation indicates, housing starts still have a long way to go just to get back to meet projected demand.
Source: Hovnanian Enterprises Investor Presentation (link opens a PDF).
The underbuilding over the past few years could lead to a boom in the years ahead. In a recent article in The Wall Street Journal, PNC chief economist Stuart Hoffman said "there is a great deal of pent-up demand given that sales have been far below trend for the past six years." Hoffman goes on to say that "job gains, high affordability and gradually easing access to mortgage credit are supporting sales of new homes."
Further, the combination of rising rates and prices could spur buyers to make a decision to buy now before affordability begins to drop. While there are plenty of warning signs that housing might not be as strong as the numbers indicate, there are just as many signs that set 2014 up to potentially be a top year for housing stocks.
The top-tier housing stocks for 2014
One housing stock to keep an eye on in 2014 is Beazer Homes (BZH +1.05%). It was one of the top-performing housing stocks in 2013 and could continue that performance in 2014. The company is back on the path to profitability thanks to its 2B-10 plan, which is a multiyear effort to reach $2 billion in revenue and 10% EBITDA margins. The Beazer Homes plan has it increasing sales per community, active communities, and average sales prices in order to leverage its fixed costs and improve its margins. That plan really puts Beazer Homes on the pathway to be a top housing stock in 2014 and beyond.
Another top housing stock, and my personal favorite, is PulteGroup (PHM +0.79%). The company has a unique multibrand strategy that sets it apart, which is why I believe PulteGroup is poised to be a top housing stock for years to come.
PulteGroup features three distinct brands, Centex for the first-time buyer, Pulte Homes for the move-up buyer, and then Del Webb for the active adult market. The multibrand platform positions PulteGroup for the next phase of the housing market as higher rates and prices put pressure on first-time homebuyers. On the other hand, rising home prices are finally allowing move-up buyers to sell, which should lead to sales growth at the Pulte Homes brand. Similarly Del Webb buyers, who tend to pay cash for homes, now have significant home equity in the homes that they are selling, which enables them to now consider settling into a Del Webb community to enjoy the next phase of life. I think that PulteGroup's strategy will enable it to outperform its peers in the years ahead.
Top position, but not top-tier housing stocks
Toll Brothers (TOL +0.04%), on the other hand, focuses exclusively on the higher end, luxury buyer. A rising stock market as well as a firming of home prices put a prospective Toll Brothers buyer in a much stronger financial position to buy in 2014. The company remains very bullish in 2014 and at a recent investor conference said it would be shocking if homebuilding fell off in the year ahead.
Among the other top homebuilders, KB Home (KBH +0.87%) is an interesting name to watch as it's a leader in building more energy-efficient homes. KB Home was recently recognized by the EPA with a 2013 ENERGY STAR Leadership in Housing award. If more homebuyers latch on to energy as being a critical homebuying factor in 2014, then KB Home could push its way to the top of the housing stock list in 2014.
After KB Home, however, there isn't as much differentiation among other top housing stocks like D.R Horton (DHI +0.40%) and Hovnanian Enterprises to really push either name to become a top stock in 2014. Both will do well as housing rebounds, and Hovnanian should improve on its showing in 2013, but neither jumps out as being differentiated enough or having as well defined a plan as the other housing stocks on the list.
Investor takeaway
Personally, I like Beazer Homes as more of a housing rebound play, while PulteGroup is my top housing stock for the long term. Both have a much more well-defined plan for the future than others in the industry, which is why I think both could be top performers. However, a lot is riding on a pickup in housing demand, which continues to remain elusive.
Our top stock for 2014
