You probably think of where you live as your home. But there are companies that make their business by providing you with that home. In fact, you might find that there are housing companies worth watching that you never considered once you expand your view of the sector. Here are three worth thinking about: D.R. Horton, (NYSE:DHI), AvalonBay Communities (NYSE:AVB), and Plum Creek Timber Co. (NYSE:PCL).
The horse's mouth
When it comes to the housing market, you can't get any more direct than a homebuilder such as D.R. Horton. Its business runs the gamut from entry level to luxury homes. So if you are watching housing, you'll get a view of the entire industry by watching D.R. Horton. But it's also diversified across the country, with operations in 79 markets across 27 states.
The big drivers to watch here aren't always what you'd think, either. Clearly, housing demand is the big one, and the one that caused D.R. Horton and its fellow builders such heartache during the 2007-2009 housing-led recession. On that front, actual homes built and order backlog are key factors. But you'll also want to keep a close eye on costs.
When it comes to costs, labor, land, and lumber are three important issues. Labor gets expensive in boom times but can also be hard to find after a bust, since workers find other jobs. In other words, labor shortages can actually constrain growth in good times. Land and lumber, meanwhile, are commodities subject to often volatile swings based on supply and demand. You'll want to make sure a homebuilder always has adequate access to both.
A renters world
But housing isn't all about owning, a fact that's become increasingly relevant after the housing bust since more and more families appear to be renting. On that score, you'll want to watch some landlords, too, if you're taking a look at the housing market. Here, AvalonBay is one of the industry leaders.
AvalonBay is a real estate investment trust that owns a portfolio of mid-scale to upscale apartment communities in high barrier-to-entry markets. It owns or has a stake in over 275 apartment buildings in 11 states. That represents over 80,000 apartments that people call home.
One of the interesting things about AvalonBay is that it's an active portfolio manager. So it keeps a close eye on the markets and has a solid history of buying when prices are cheap, building when buying is more costly, and opportunistically selling older assets to provide money for building newer, better ones. It's also a strong performer. For example, the REIT's dividend stalled during the 2007-2009 recession, but it survived intact and has since started to move higher again. If you want to get a quick read on where the value is on the apartment side of the housing market, watch AvalonBay.
While D.R. Horton and AvalonBay are both directly in the housing market, don't forget suppliers such as Plum Creek Lumber. You don't see too many homes built without wood. And that means timberland, of which Plum Creek owns over 6 million acres across various regions of the United States.
While supply and demand are largely driven by the housing cycle, lumber is an interesting resource. Managed well, a forest renews and refreshes constantly. So the 6 million acres Plum Creek owns is almost like a factory, pushing out trees year in and year out without depleting the supply. In bad years, fewer trees get cut down. In good years, more. But so long as Plum Creek doesn't overharvest, it's land holdings are pretty close to a tree annuity.
In fact, timberland and the wood products it produces, which includes various paper products, is perhaps the ultimate recycling business, since wood products are biodegradable. That said, while non-housing industries provide a base of business underneath lumber, it's the housing market that is the big determinant of results. Like D.R. Horton, the recession was tough on Plum Creek.
Homes and more
So when it comes to watching the housing industry, your direct exposure will come from builders such as D.R. Horton and landlords such as AvalonBay. And following, or owning, them will keep you in touch with what's going on. But don't forget ancillary industries such as timberland owner Plum Creek. Housing cycles play a key role in that company's results, too. The best part here, however, is that all three of these housing companies happen to be good ones that you might find fit well in your portfolio.
Reuben Brewer 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.