As the main culprit responsible for the credit crisis and resulting Great Recession, the United States housing market has spent much of the last few years in the doldrums. Falling home values and rising foreclosure rates have really taken a toll on the overall sector. Over the last few years, housing related stocks have seen their share prices dwindle as a lack of available credit, and general deleveraging has prevented many from home ownership. However, things may be finally picking up for the housing market. Recent data may support a slight turn around in the all-important sector. While there are some speed-bumps ahead, now could be an interesting time for investors to finally add stocks in the sector.
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The U.S. housing sector may have finally turned a corner as important data has begun to turn positive. A plethora of housing-related statistics came out this week and most showed significant improvements. Home sales continued to rise with both new and existing showing increases. According to the National Association of Realtors, its proprietary Pending Home Sales Index rose 2% to 97. This is the highest reading since April 2010. In addition to January's positive data, the industry group revised December's estimated statistics upwards. Pending home sales for the month were adjusted to show a much smaller 1.9% drop instead of the previously reported 3.5% decline. Throughout January, new home sales also improved, rising 3.5% over the previous year to 321,000 units. Inventory levels remain at just 5.6 months of sales.
Home prices are also seeing signs of life. According to the Federal Housing Finance Administration (FHFA), seven of the nine major regions throughout the country reported home price increases. House prices rose .7% between November and December following a .7% increase in November. Looking at quarterly data year over year, home prices actually declined by 2%. However, that is a smaller decline than the past two quarters. The FHFA said of the increase that "this growth adds to mounting evidence that the real estate markets are seeing at least some signs of life."
Finally, a key confidence number for the home builder or construction firms has climbed for the fifth straight month, reaching the highest level in more than four years. The National Association of Home Builders/Wells Fargo housing market index rose to 29 in February from 25 in January. While the gauge is still below what is considered "good," the index has more than doubled since September.
Time to Add Housing?
While the foreclosure tide has yet to recede and prices still remain depressed, things are starting to look up for the sector. For investors, taking a small calculated bet on the housing sector could be a portfolio opportunity. The iShares Dow Jones US Home Construction ETF (ARCA:ITB) tracks 27 homebuilders including DR Horton (NYSE:DHI) and Pulte Group (NYSE:PHM). Since inception in 2006, the fund has performed terribly by losing 21% annually. However, given the potential rebound for housing, the fund could finally start to turn around. Likewise, the SPDR S&P Homebuilders can be used a proxy play.
Much like the retail sector, high end housing continues to do well. Luxury builder Toll Brothers (NYSE:TOL) remains the king in the segment. Recently speaking to Bloomberg, CEO Doug Yearley said that the firm had been seeing a rise in traffic, deposits and orders. While the firm did miss earnings in its recent quarter, the company anticipates building 3,200 homes in 2012, at an average price between $550,000 and $575,000. Toll's stance as THE high end builder, could be a great way to play housings return than competitors like Hovnanian (NYSE:HOV).
Perhaps the best way to play the return of the housing market is through the duo of Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). Both retailers stand to benefit from needed home upgrades as well as the improving consumer confidence numbers. In addition, the pair offers 2% plus dividend yields. That income could provide the cushion needed to survive the slow up-climb.
The Bottom Line
As the main culprit from the Great Recession, the U.S. housing market has been a real stinker for the last few years. However, recent data has begun to point in the right direction. For investors, now could be the time to add the sector to a portfolio. The previous firms, along with the PowerShares Dynamic Building & Construction ETF (ARCA:PKB), make ideal selections.
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned within this article.