It's hard to forget the housing market crash of 2008. Some have been cautious to return to the real estate market, while others have made fortunes off well-timed purchases in 2009 and 2010. As the housing market has rebounded over the past 5 years, we are approaching the pre-crash levels of 2007, and it has raised some concerns that we are preparing for another downturn. However, there are some interesting investment opportunities that allow investors exposure to the housing market without having to buy real estate.
According to the United States NAHB Housing Market Index, pre-crash index levels were in the high 60s and low 70s. Now, in 2016, the index is floating around the high 50s and low 60s, with May's data coming in at 58. While we are still well below the pre-crash levels, growth has started to slow as the market approaches previous highs. With that being said, I believe there is still room for growth before we retest the multi-year high of 78 we saw at the end of 1998. Homebuilders, like Toll Brothers (NYSE:TOL) and Beazer Homes USA (NYSE:BZH), have both recently reported earnings and provided positive expectations for new home growth. According to the recent housing data, new home sales rose 16.6% in April, but are still well below 2008 levels.
While both Toll Brothers and Beazer homes provide an interesting investment opportunity, there are some benefits to Beazer over Toll Brothers that outweigh the risks, making this a good candidate for a long position. First, Toll Brothers is primarily focused on building luxury homes, while Beazer offers a variety of home styles for a larger range of buyers. In my opinion, this gives Beazer a greater revenue potential regardless if the economic outlook continues to rebound or starts to flatten out. While Beazer has recently seen both analyst upgrades and downgrades, their one year price target remains at $12.67, offering a nearly 49% upside to the current stock price of $8.32. One issue with Beazer is their high debt-to-equity ratio of 2.3, which is well above industry levels. They are actively trying to reduce their debt and are on track to retire $100 million in debt this year and $70 million next year, which should increase revenue over time. On the other hand, they have a significant Tangible BV per Share of $19.15 and Cash per Share of $4.08. This liquidity helps reduce the risk of investing in the company, and as they continue to reduce their debt, the risk should continue to diminish and earnings are expected to grow.
In addition to these metrics, Beazer has also reported other positive, forward-looking numbers that provide insight into their pipeline for the remainder of 2016 and into 2017. First, they have seen increases in average home sales prices of 7%, and up to a 13% increase in their Western region, with expectations for continued growth into 2017. They currently have about $1.8 billion, or 4 years, of total lot inventory. This is right in line with their deleveraging plan and will help them activate "land held for future development" and turn these investments into revenue producing assets. At the end of March, they had approximately $50 million in land held for sale, which is expected to close by the end of this fiscal year.
While Beazer is actively pursuing these value creating activities, there are some potential risks to the company. As mentioned above, Beazer currently has high debt levels that could make it difficult to raise more capital. The homebuilding industry is extremely capital intensive, and without the ability to raise additional funds, this could affect their ability to start new projects or complete existing ones. Another risk is related to interest rates and the FED is standing at the ready hoping to increase rates. Higher mortgage rates would make buying a home more expensive in the near future, this could keep the demand lower for new and refurbished homes.
While there are a number of investment opportunities in the real estate market, like REITs, homebuilders, building supply companies, etc.; I believe Beazer Homes provides the potential for growth and higher returns as we approach the summer. With their debt reduction efforts, relatively low share price, high book value, and the overall economic outlook, I believe Beazer offers a unique investment opportunity.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BZH over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.