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8 Stocks to Benefit from the Coming Uptrend in Housing

by: Thomas Smicklas April 14, 2008 | about stocks: GE / IXG / LOW / NRF / RSO / USG / WMT / WY    

Thomas Smicklas

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The astute investor with the luxury of time should be looking past the current loan, foreclosure and home building situations and begin to focus on "what's next."

I am fortunate to have the advantage of being in several facets of the real estate business. Here are some thoughts along with a few stock picks.

Increased stips (stipulations to receive loan consideration) including income, employment stability, cash on hand (20%), family stability, credit and credit scores, are making it hard for many to secure a mortgage. FHA loans will be the best way to go for most mortgage products. And many will have to accept less of a home, especially a new home, which is not a bad thing since so many buyers purchased McMansions expecting appreciation of the property to bail them out of a poor financial decision.

Homes are a place to live - not an investment. Thus, I am focusing my efforts on two areas: rental property that is clean and well-managed, and single family homes built for the lower middle class and middle class that are within reasonable budgetary constraints.

Are there mortgage brokers and some banks still using questionable financing to structure mortgages? Emphatically, YES. But the word is out on foreclosed home angst, and more home buyers are becoming semi-educated to say no to loans that seem too good to be true. Foreclosed properties are generally trashed by their unlucky owners and are usually of no interest to home buyers who prefer a home they can move into and live comfortably in immediately.

Never, NEVER, have faith in one property appraisal. Get two appraisals or more. Assume that appraisers are still tight with those who want you to pay a premium price for property.

Rehab properties are being mass marketed by many of the same crowd who poorly rehabbed properties or worked over gullible real estate "investors" with no money down, cash out deals a few years ago. I see them everywhere I travel and get a laugh out of them pitching the same old snake oil to a new group of millionaires-in-waiting. Avoid them like the plague.

Banks are sitting on their best properties knowing the market will likely turn in their favor sooner than most expect. The fact that banks or their shills buy back most of the foreclosed properties at auction says something about their plan. Real estate garbage is left for the bottom feeders to pick from. Sure, short sales, etc. are possible, but for the average home buyer somewhat complex tactics should not be attempted - especially with a pitch man hawking them.

Rentals are a great place to be now. With good, clean home buyers being shut out of the credit market, middle class and upscale rental properties bought right are a terrific investment. Same for commercial or office properties. Buying right is the key. And, making sure one understands that rental real estate is a not in the final analysis a brick and mortar business. It is a people business.

Home builders love those McMansions. They look great, have decent floor plans and have a superb profit margin using cheap cookie-cutter materials, especially when they could wrap their own mortgage and title company into the transaction. This is changing. Smaller, more energy efficient homes priced for those who want a good, clean residence in a decent area without cathedral ceilings,Viking kitchens and huge lots to maintain are "in." Wasted square footage is out.

With many big box builders and large independent contractors dying on the vine with excess lots it is easy to buy lots at 50 cents or less on the 2006 dollar. Contractors who would not lower their bids and reserved themselves for custom homes on golf course communities are starving as well. I find them falling all over themselves trying to get work and they will now work in many cases at half of last year's price or less.

This cycle will end, as do all cycles. But I am convinced that the large cheaply constructed mansions are overbuilt and are beginning to show why they were priced relatively cheap to begin with, in addition to being energy hogs.

Labor rates will fluctuate, but I believe that the smug take it or leave it offers of the past few years are not going to return soon, if at all.

Here are some stocks I like:

Lowe's (LOW) has placed, designed and stocked its stores with home stuff guys like and women love. It is trading at $24.53 per share, too cheap for outward looking investors. It should leave Home Depot (HD) in the dust.

IShares Global Financial ETF (IXG) mirrors the index which will do smartly in an upcoming real estate and financial resurgence cycle. IXG trades at $72.59 per share. As with all ETF's, place a limit order to avoid too large a spread when you buy.

U.S. Gypsum (USG) is a best of breed building materials company. You need its products. Trading at $38.53 per share, it is already showing signs of establishing a long term uptrend.

Resource Capital (RSO) is executing well now and has a commendable portfolio of commercial loans with a default rate of less than 1% as reported. This appears to be an honest company punished for the misdeeds of others. RSO trades at approximately $7.80 per share.

NorthStar Realty Finance Corporation (NRF) is, like Resource Capital, a company that deserves your attention. It has a solid reputation in the business and is trading at about $9.00 per share.

Weyerhauser Company (WY) is a "wait and watch" stock. Many view the stock as a short term loser based upon slow land and timber sales. Trading at $62.32 per share, I would buy on dips below $58 and wait. The assets of this company are excellent. WY will perform very, very well later this year.

General Electric (GE) and Wal-Mart (WMT) will benefit in several ways from this article's content and predictions. I prefer WMT. If Wal-Mart decides to expand its property improvement departments at both their flagship store and at Sam's Club, the stock price will be enhanced (note to Wal-Mart: either improve your lousy produce departments or diminish them and stock up with home improvement products).

I know this article may seem too contrary and unconventional, but my goal is to have you start thinking ahead, not looking back into the rear view mirror.

Disclosure: The author holds a long position in IXG.

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This article has 20 comments:

  •  
    Apr 14 11:07 AM
    Well written article, I agree on all points, with the exception of one: it appears you are expecting housing to bottom very soon, whereas I expect at least another year of weakness. The downtrend will slow, but it will still be declining.
    Reply
  •  
    Apr 14 12:25 PM
    Housing has a decade of weakness. Take Colorado as an example. Their housing boom led the nation by 4 years, and Colorado did not enjoy the real estate boom from 2002-2006. Home prices were flat or declining in most areas, while the most "desirable", landlocked areas increased slightly. Home prices are falling somewhat, but are mainly stagnant. Home sales and prices will stagnate in Colorado for at least another decade, giving them a 20 year period of no real appreciation. Home prices should fall 20-30%, but Realtors, banks and lenders will do what they can to prop up the market. This will result in a stalemate between buyers and sellers, and stagnate the market further. Plenty of rentals here though, and they are cheap.
    Reply
  •  
    Apr 14 01:04 PM
    Colorado's one data point. Many factors contribute to local economies. The one thing I feel sure about is that (nationally) we are not quite at "bottom". We need "change" in the White House, IMHO. Housing is symptomatic (in part) of the whole screwed-up economy.
    Reply
  •  
    Apr 14 01:17 PM
    I want some of what you are smoking. House prices are coming down. Way, way down. It will take years. There is no bottom in sight.
    Reply
  •  
    Apr 14 01:28 PM
    Tom,

    Please try this and let us know how it goes in a couple of years.
    Reply
  •  
    Apr 14 02:23 PM
    "I want some of what you are smoking. House prices are coming down. Way, way down. It will take years. There is no bottom in sight."

    You've got a crystal ball? What's the "P/E" of a house? You can look at rent vs own ratios and mortgage vs per capita income ratios, but I'd say calling a bottom in the housing market is harder than calling a bottom in the stock market.
    Reply
  •  
    Apr 14 03:33 PM
    Yes. I have a crystal ball. Says right here 'home prices are falling hard.'
    Reply
  •  
    Apr 14 06:37 PM
    deanfv,

    Its too bad that your crystal ball prediction is already priced into stocks levered to the housing market. This just in: Everyone knows housing prices will fall at least 20% in 08. Tell me something I don't know.

    Getting in on these stocks now is a good idea. Yes, Smicklas is a little too optimistic, the housing market is in a horrific state, but when you see it on the news every day investors must start thinking the bad news is overly priced into the market, especially when homebuilders and building materials co's like USG miss earnings by 40% and increase in price the vary same day. Shorts are obviously beginning to get squeezed out of theses stocks. Any sign of life or even if housing prices fall 15% instead of 20% in 08 will absolutely kill the shorts. By reading your comments it seems like you only get your investing information from ABC news or CNBC. You might want to start thinking of broadening your horizons and coming up with your own opinions instead of regurgitating what I hear every night on TV.
    Reply
  •  
    Apr 14 09:07 PM
    Housing still might fall, but how long until the worst is priced into the market? Sure, housing can fall, but if it's consider "bottomed" in the market we should be fine. So, I agree with the article. Good article.
    Reply
  •  
    Apr 14 09:13 PM
    Warren Buffet owns some USG? Yes or no?
    Reply
  •  
    Apr 15 12:41 AM
    Interesting comments. The thrust of the article was to be the great value of obtaining rental real estate and serving the needs of the lower middle and middle class. When you can buy a home now and get a 20-30% return with rents plus additional tax benefits (if you buy smart), who cares if housing goes down another 10%? Or 15% The stocks that will benefit are just icing on the cake a bit later.

    Passive investors or those just not willing to educate themselves to make a great total return in active real estate investing should just stay focused on commodities or securities.

    Some may want to review my observations in the article as to whom is buying and profiting now in the housing market.

    Reply
  •  
    Apr 15 07:37 AM
    RSO and NSF are and have been paying out dividends higher than earnings. That is unsustainable.
    Reply
  •  
    Apr 15 11:47 AM
    Not so fast...It remains to be seen how bad things will get. Two years ago there were folks who did not believe that homebuilders and banks would lose so much money. I would be very very careful about who you listen to today.

    PS, Your article did not provide me with enough good info to make an intelligent decision to invest in any of these investments.
    Reply
  •  
    Apr 15 12:10 PM
    Very well written incisive comments. I get a big kick out of the diversity of opinion on this board from the paranoid, ie: "Thomas Barta" to Mr Know it All, ie: "slvrslam". That is what makes the market go around. Each investor has his or her own objectives and time frames and tolerance for volatility. The average mean performance of the market long term is about 11% a year. The very vast majority of investors don't even achieve that, and majority of the comments on this board make it clear why that is true.
    Reply
  •  
    Apr 15 05:47 PM
    More reaction here from the media CW than from reasearch.

    Notwithstanding the carefully selected media horror stories and cherrypicked "worst" data, a review of national statistics will show that in the last forty years no housing downturn has lasted longer than 3-4 years, maximum. Also, despite contrary claims, the current national foreclosure data is not yet appreciably different from other far less publicized corrections.

    By 2009, we'll be climbing out of this housing slump, and the market will anticipate that even sooner. With all the money that the Fed has flooded into the banks, we'll see them all fighting to make loans, again, as contrary to popular wisdom as that seems. No, there won't be any no-docs 125% loans, but, business will be brisk.

    Reply
  •  
    Apr 16 12:14 AM
    has anyone here ever heard of the" case shiller index ". This is produced by a person who predicted the tech bubble while everyone else thought he was crazy. He thinks the housing market is only at the beginning stages of a terrible downturn. Things are very bad and they are going to get alot worse, dont kid yourself.
    Reply
  •  
    Apr 16 11:08 AM
    To all who are looking for the best bottom-sign: look for very low attendance at bank REO auctions. The number of potential bidders will be less than the number of lots being auctioned at bottom, and auction winners will need to hold for 3-4-5 years sans on-cash returns while waiting.

    Doomsters: Unlike equity mkt bottoms, RE bottoms are very wide and grinding in nature. The cicada-like cyclical emergence of infomercial hucksters hyping "get rich quick using OPM" schemes is a classic waypost sign that the bottom is in sight. The reality of their systems is that if they were truly so great you would not be seeing them on late nite TV.

    Do some DD about informational advantages and how in the RE markets it is exceedling rare for the small investor to actually have the necessary informational advantage to overcome the high frictional, and carrying costs or RE.
    Reply
  •  
    Apr 19 06:48 PM
    NRF .. Northstar Realty Finance .. does not belong in this roundup.

    It is confined to commercial real estate, and has no subprime or residential exposure.

    In that area, commercial real estate, however, it is worth a look.

    John K --
    Reply
  •  
    Apr 21 09:34 PM
    LOW

    I bought in Jan. with the intention of seeing a greater demand by the home owner that still wants to live the new home lifestyle. They just won't be paying a contractor anymore, they will be doing it themselves. As a contractor, I know where we get our materials, and it generally isn't at Home Depot or Lowe's, although there is some shopping there. The home owner will not pay the prices we pay for our materials, and the convenience we get from shopping at the suppliers who cater to contractors.

    Now, if you want to see the difference between orange and blue, go for yourself. It will become obvious to you that the orange has done poorly and that Lowe's has done a marvelous job of moving in on HD's proprietary crap.

    HD has done a very bad thing, and that was to move into the realm of the contractor by offering in home services. Way to kill you target market you fools.

    I am sticking with my LOW. Regardless of what home values do, people will still be sticking money into their homes, they just won't be hiring contractors to do it, which means more money going to these companies.

    This should be obvious, but thanks for the article.
    Reply
  •  
    Jun 30 12:42 PM
    In Switzerland, probably in most other countries, the scam type get-rich-quick schemes are not lawful because, as you say, they are fraudulent. We need truth in advertising! note: last year when some toy was taken off market, CNN visited the office that screens toys coming into the USA. It was one old man! The Bush appointee over him, Commis. of Consumer..... was a high class woman who knew little, cared less, was uninformed -- but probably had a big office, chauffer and salary....Bush crony.


    On Apr 16 11:08 AM Derf wrote:

    > To all who are looking for the best bottom-sign: look for very low
    > attendance at bank REO auctions. The number of potential bidders
    > will be less than the number of lots being auctioned at bottom, and
    > auction winners will need to hold for 3-4-5 years sans on-cash returns
    > while waiting.
    >
    > Doomsters: Unlike equity mkt bottoms, RE bottoms are very wide and
    > grinding in nature. The cicada-like cyclical emergence of infomercial
    > hucksters hyping "get rich quick using OPM" schemes is a classic
    > waypost sign that the bottom is in sight. The reality of their systems
    > is that if they were truly so great you would not be seeing them
    > on late nite TV.
    >
    > Do some DD about informational advantages and how in the RE markets
    > it is exceedling rare for the small investor to actually have the
    > necessary informational advantage to overcome the high frictional,
    > and carrying costs or RE.
    Reply
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