3 Trades To Ride The Rebound Of The Housing Sector

by: BubbleBustInvesting

Anyone who had doubts about the recovery of the housing sector must have second thoughts this morning.

Two separate reports published on Wednesday confirm that the housing recovery is for real. The first report is the MBA Mortgage Index, which showed that mortgage application to buy homes increased 1 percent over the previous week, reaching the highest level since June. The second report showed a big jump in housing starts and housing permits reached the 872,000 and 894,000, respectively, beating analysts' expectations by a big margin. How can investors benefit from this trend?

One obvious trade is to buy homebuilders. The problem, however, is that the sector had a big run up from their multiple year correction. Yet according to an article published in Barron's last month, the homebuilder sector has room to grow. We also see five tailwinds to the sector's growth:

1. First, improving macroeconomic fundamentals, especially job growth, the most important factor for housing affordability.

2. Second, improving microeconomic fundamentals. New home inventories are declining and home prices are stabilizing. Industry leaders like Toll Brothers (NYSE:TOL), Lennar, MDC Holdings (NYSE:MDC) and DR Horton (NYSE:DHI) have been reporting better than expected earnings.

3. Third, improving technicals. Trading volume has been picking up across the industry and some charts (e.g., Lennar's and Toll Brothers') look bullish.

4. Fourth, large short positions -- Close to 41 percent of Honvanian's shares and 37 percent of Standard Pacific are short.

5. Fifth, record low mortgage rates (3.59 percent on a 30-year mortgage).

Another obvious trade is to buy banks like Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) that have a big exposure to the housing industry.

A less obvious trade is to buy homebuilder material suppliers like Masco corporation (NYSE:MAS), furniture and fixtures makers like Williams Sonoma (NYSE:WSM), even solar panel makers like First Solar (NASDAQ:FSLR), as it has become the trend in many states to install such panels in new homes.

A word of caution: Homebuilders and materials suppliers are highly economically sensitive sectors. This means that an economic slow-down could hurt the sector, especially if it results in a slow-down in employment growth-the most important driver of home demand.

Disclosure: I am long TOL, HOV, MAS, FSLR, DHI, WFC. 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.