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Signs Of Housing Bottom Building

Posted: May 19, 2009 11:36 AM by Aryeh Katz

Tickers in this Article: CTX, RWR, C.XRE, MDC, DHI, PHM

According to most commentators, the cause of the recent financial turmoil both in America and abroad was a bubble in real estate. Those same experts say it will be a re-stabilizing of the property market that signals an end to the current crisis. If the stock market is a discounting mechanism, it stands to reason that the market’s current appraisal of the real estate sector might be indicative of just such a steadying. With that in mind, we examined several large homebuilders and the broader market homebuilding ETF’s to determine exactly where we stand in that process.

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Benefitting From the Bottom
Pulte Homes (NYSE:PHM) is an experienced hand in the real estate market. The homebuilding business operates in 49 markets across 25 states and the company’s stock yields 1.66% (as of May 15th) – actually at the high end for the industry. The stock has come off the lows it set in November at $6.49 and now trades 50% higher at $9.63.

Pulte is also in the midst of acquiring competitor Centex (NYSE:CTX) for $1.3 billion. If the deal closes later this year, Pulte stands to become the largest homebuilder in America. Deals such as the Pulte acquisition are often indicative of a market or sector bottoming but for those who rely on expert opinions, none other than Alan Greenspan, former Federal Reserve chief, recently suggested that the U.S. is "at the edge of a major liquidation" in the stock of unsold properties. If that’s so, we should expect a recovery to be close at hand.

Building Up
Other homebuilding giants that should profit from a turnaround in the sector are D.R. Horton, Inc. (NYSE:DHI), up about 150% from 52 week lows and M.D.C. Holdings, Inc. (NYSE:MDC), which pays an industry-leading 3.10% annual dividend. Both of these issues have also earned massive (90% or more) institutional followings recently, another vote of confidence for those currently wavering on the sector.

For those who prefer ETF investing, there are a couple of REIT-based funds with significant payouts that have also traded well recently. The first is the SPDR Dow Jones Wilshire REIT ETF (ARCA:RWR), currently paying a 6.12% annual dividend. The other is the iShares Canadian S&P/TSX Capped REIT Index Fund (TSX:C.XRE), which pays 4.33% annually. Both have appreciated between 25-30% since March and stand to gain further when and if an actual recovery in property prices takes hold.

The Wrap
There are a number of good signs that new foundations are being laid in the real estate sector. Perhaps now is the time to reconstruct our portfolios to take advantage of that turnaround. (Read Buy When There's Blood In The Streets, to learn how contrarian investors find value in the worst market conditions.)

By Aryeh Katz

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