Investing in Home Builders

Investing in home builders is currently out of vogue as lower housing starts, fewer sales of existing homes, and a dearth of building permits would predict. The numbers of unsold homes may be rising again if the US government goes into default on its debts. Investing in home builders who cater to the very wealthy may still be profitable but for the broader range of homes the picture is pretty bleak. One million three hundred thousand households make up one percent of the total in the USA. From 2004 when 69% of households owned their own homes to 2015 when projections say that 64% will own their homes. That is six million five hundred thousand households that will be renting and not owning their homes. Simple fundamental analysis of declining home sales tell us that home builders as a group are not going to prosper in the next few years. On the other hand builders and managers of apartments will find over six million new clients in the coming years. Real estate investment trusts may do well if invested in the rental market.

Home builders are certainly not on the first page of today’s value investing opportunities. However, economic cycles are called that because they cycle. If and when banks start offering mortgages with lower down payments and when the economy slowly but surely mends itself the prospects for home builders may start to look up. Using the old adage about buying when there is blood in the streets, the next year or two could be an excellent opportunity to pick up a home builder stock or two when their fortunes seem the lowest. For the long term investor interested with an investment horizon of decades instead of months the home builders might turn into a good buy in the not too distant future. Our point in discussing this is not to suggest that the investor buy Lennar, KB Homes, Hovnanian, or any of the rest. It is to help investors develop a rationale for investing using a specific example, in this case investing in home builders in a down market.

When considering what will, hopefully, be recovering stocks in a couple of years the investor will want to look for the basics. Does the company have cash? How much debt does it carry? In the case of investing in home builders how much land does the company already own and is that land in areas when people want to build and live? The issue will not just be investing in companies with cash but investing in companies with a viable future based on good management and an attractive product line. In this case the issue will be if these builders have modified, and probably downsized, the homes that they build to be more in tune with the post recession world. Young adults are starting to sound like their grandparents and great grandparents, the survivors of the Great Depression. Saving instead of spending and an eye to the future instead of conspicuous consumption seem to be the order of the day. Those home builders who catch on to this growing trend may be the ones to look for when picking new winners by investing in home builders.

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