Fed’s aggressive bond buying is showing some results as the U.S. housing markets begin their recovery. Amid this recovery, I have shortlisted some companies that have significant exposure to the U.S. housing market. I believe these companies are poised to benefit from the housing recovery. Therefore, these stocks are the best way to play the U.S. housing recovery.
The rebounding housing market
U.S. housing is showing signs of a recovery. The Case-Shiller Home Price Index (composite 20) has increased from 146.5 at the beginning of the year to 149.8. This index is a national price index for 20 cities.
The Wall Street Journal reports that home prices climbed the highest in the metropolitan areas in more than seven years. Much of the hike in prices is due to a tight supply of housing. This is why the supply and demand balance is clearly inclined towards the sellers in a large proportion of the country.
Further, the housing market is being well supported by the low mortgage rates, and this has created ample buying power for home buyers. The average 30-year fixed mortgage rate has touched 3.51%, while the average 15-year fixed mortgage rate has plunged to as low as 2.69%. These record low mortgage rates have made housing more affordable.
Much of the decline in the mortgage rates is a result of the Fed’s record stimulus efforts. Continued efforts by the Fed to buy Agency residential mortgage backed securities would mean further support to the U.S. housing markets. Therefore, U.S. financial companies with significant exposure to the U.S. housing markets should experience growth.
Largest housing lender with a diversified asset base
Over the past three years, the bank has reported record profits including an $18.9 billion profit for the full-year 2012, supported by the housing recovery. Warren Buffett recognizes the potential in the bank’s growth due to the recovering U.S. housing markets, which is why Wells Fargo & Co (NYSE:WFC) remains his favorite financial stock. Buffett is the largest shareholder of Wells Fargo & Co (NYSE:WFC).
The diversified business model of the bank enables it to benefit from the prevailing interest rates. Investors were concerned that the bank will be stuck with loans and other assets that might lose value faster than the liabilities. However, the concerns were brushed aside by the bank’s CFO who said Wells Fargo & Co (NYSE:WFC) will benefit from higher rates. This is because management has constructed a portfolio in a way that Wells Fargo & Co (NYSE:WFC)’s liabilities will lose value faster than its assets causing the bank to make higher returns.
Going forward, the bank will continue to benefit from a talented management team, a diverse business model, and a retail deposit base that helps drive the highest net interest rate margin. The retail deposit base is both cheaper compared to bond funding and also more stable.
Growth from California
In the latest SEC filings, the company reported enough inventories to meet 5.6 years of demand at the current pace. Besides, the company anticipates strong growth in new orders and total backlog and should grow at a fairly rapid pace as the markets continue to rebound.
Standard Pacific Corp. (NYSE:SPF) has made certain significant investments in attractively-priced land, which will drive the company’s margins higher and post a strong growth in 2013. The key is the company’s attractive long-term land position in California, where tight existing home inventory and a shortage of finished lots should lead to above average pricing power and margins. Further acquisitions made by the company will also give attractive returns due to Standard Pacific Corp. (NYSE:SPF)’s disciplined approach and the ability to leverage its land development expertise.
The company has a large concentration in the California region with around 55% of revenue coming from the region and 55% of inventory in that region. Going forward, the company will benefit from the region’s tight home inventory.
Two fold benefits
I am encouraged by the company’s focus on aggressive growth, as well as recent announcements surrounding its combined offering. However, given the relative outperformance of the stock compared to other homebuilding peers, I continue to look for an entry point. Investors should look for a trough as an entry point.
Further, the company has plans to expand its geographical footprint within the California and the Texas regions. The land deals in these regions will enable the company quick inventory turns and redeployment of capital. Besides, the company’s focus on energy efficiency in California will benefit it in the coming quarters.
Conclusion
The aforementioned stocks are poised to benefit from a fast U.S. housing recovery. Therefore, they present an excellent buying opportunity.
Adnan Khan has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 Ways to Play the Housing Recovery originally appeared on Fool.com is written by Adnan Khan.
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