New home sales were strong in April, according to Bloomberg. What was more interesting, however, was that the median home price went up. That’s good news for builders of more expensive homes like Toll Brothers Inc (NYSE:TOL) and NVR, Inc. (NYSE:NVR). Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI), however, aren’t exactly going to suffer.
Housing Market Continues to Impress
The average sales price of a home has also picked up of late. That, too, makes sense, since the distressed market is increasingly more competitive. Moreover, Bloomberg reports that sales of $400,000 or more homes increased while sales of $300,000 or less homes fell.
The Low End
Home builders Lennar Corporation (NYSE:LEN) and D.R. Horton, Inc. (NYSE:DHI) both focus on starter homes. That’s allowed the pair to benefit early from a housing uptick. Like most home builders, the top and bottom lines crumbled at Lennar and Horton. However, both used the downturn to streamline their businesses and prepare for a recovery.
While that recovery has been a long time in the making, both are starting to see a return to top and bottom line growth. Although the shift toward higher cost homes isn’t keying in on their entry home market niche, so long as new homes sales are strong, there will be plenty of starter homes to sell. So a rising tide will lift all boats.
Horton’s earnings went from around a quarter a share in 2011 to well over $2 last year. While that isn’t a sustainable rate of improvement, there’s no reason yet to worry about the bottom line. Lennar’s earnings improved from around $0.50 a share in 2010 and 2011 to over $3.00 in 2012. And like Horton, there’s no reason to expect profits to pull back.
The shares of both companies have seen rapid rises, so they are most appropriate for momentum investors.
Higher Class Fare
Toll Brothers Inc (NYSE:TOL) focuses on the high-end market, selling single family and attached homes in luxury development complexes. Sales fell 75% between 2006 and 2011. That said, the company streamlined during the lean years and appears well positioned as the recovery starts to take hold. In fact, the company managed to earn nearly a quarter a share in 2011 despite the massive revenue drop.
With the sale of higher-end homes starting to pick up again, Toll Brothers Inc (NYSE:TOL) should see increasing demand for its properties. Driving that demand will be both an improving economy and wealthier baby boomers moving to smaller, but expensive, homes after their children have moved out of the house.
Although Toll Brothers Inc (NYSE:TOL)’s shares have recovered nicely over the last year, the shifting new homes sales mix should put it in good position to continue growing its top and bottom lines. Like the low-end sellers, though, Toll Brothers Inc (NYSE:TOL) is best looked at as a momentum play.
Something for Everyone
NVR, Inc. (NYSE:NVR) has more of a broad based portfolio, serving all levels of the home buying market. Unlike its competitors, NVR didn’t bleed red ink during the housing bust. The company’s land acquisition model, which uses land purchase options, keeps its inventory costs low and profitability high. While these facts didn’t stop the shares from falling steeply during the bust, it certainly made sticking around for the recovery much easier.
That said, NVR, Inc. (NYSE:NVR) shares trade at around $1,000, which is kind of steep on an absolute basis. Still, with offerings across the entire price spectrum, NVR is a good option for investors looking to get exposure to the housing market in a single stock. A rising tide will truly lift all boats at NVR, Inc. (NYSE:NVR). Although it’s still probably most appropriate for momentum investors, the company’s impressive history of profitability should make NVR interesting to more conservative types, too.
Still Room to Run
The housing recovery is just starting to pick up steam. If it keeps going, this quartet will benefit. With the shifting mix, however, investors who were focusing on low-end builders like Lennar and D.R. Horton might want to consider adding higher-end builder Toll. For investors who are only just getting interested in the home building space again, however, NVR, Inc. (NYSE:NVR) might be the best all-around option.
The article Housing Market Moving Upscale originally appeared on Fool.com and is written by Reuben Brewer.
Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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