Housing's 50% Off Sale -- Time to Buy the Homebuilders?

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 |  Includes: BZH, CHCI, DHI, HOV, LEN, PHM, RYL, TOL
by: Bruce Vanderveen

Commodities are shooting up -- 20% or more -- in just the last 3 months. The most common explanation? Accelerating inflationary expectations. No sign of this in the U.S. housing market though. That market drags along near multi-year lows. Indeed, the one asset the Fed wants to inflate, housing, shows few signs of revival.

But, is the housing market now bottoming? Well, maybe. After falling over 50% the last 3 years Zillow says my central Florida house has actually increased in value two months running now. Nothing to get too excited about -- total increase is less than 3%. Nonetheless, it is welcome news.

Why It Is So Hard to Reflate the Housing Market

You can buy a Krugerrand, bury in the ground, and forget it --well, maybe not totally forget it. A house is a different story, it sits there, immovable, in plain sight. Everyone, including the tax appraiser, can see it. Lived in or not, carrying costs such as taxes, insurance, and maintenance are major.

An investment in a house takes some serious savings, good credit, and faith in the future. All three currently are in short supply in the U.S. Even with a 50% off sale, its hard to buy.

Is Now a Good Time to Invest In U.S. Home-builders?

Home construction has been in the doldrums for 3 years now, plenty of time for the bad news to figure into equity prices. Let's look at how the home builders are doing.

Lennar (LEN), after bottoming last September, is up 50% -- near its 52 week high. DR Horton (DHI) and Toll Brothers (TOL) are up modestly from 52 week lows while Pulte (PHM), showing the least improvement, is not far from its 52 week low.

The smaller caps don't fare much better. Ryland (RYL), Beazer (BZH), Hovnanian (HOV), and Comstock (CHCI) are all in the low to mid portion of their 52 week ranges.

The Motley Fool community gives all the home builders mentioned in this article their lowest rating, one star -- pretty much a thumbs down.

Two of my favorite metrics are insider buying and price over free cash flow (P/FCF).

Looking at these two parameters we see some possibilities. Lennar (LEN) has seen a 28.7% increase in insider ownership over the last 6 months while Beazer (BZH) has a 24% increase. Beazer also has a low P/FCF of 7. Comstock (CHCI) looks great with both metrics. It has a 60% increase in insider ownership and a super low P/FCF of 1.6.

Micro-cap Comstock ($26 million), according to their transitional website, offers "moderately priced . . . livable rental communities in the Washington, DC area." The company offers both rentals and for-sale single family homes, town homes, and condominiums. They also have a Raleigh-Durham presence.

Summary

If we are truly headed into an inflationary period, housing, with its leveraged appreciation potential, will eventually respond to the upside. Headwinds include a large inventory of foreclosed homes, high unemployment, rising interest rates, and an uncertain future. All the above keep home values low for now.

It is easy to speculate with commodities such as precious metals. Housing, however, will be the true test of whether the Fed is successful in reflating real assets in the U.S.

Credits: Insider transactions and P/FCF data sourced from finviz


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.