Charles Sizemore on the Housing Recovery

Charles Sizemore gave his thoughts on the recovery in the housing market to the Wall Street Journal’s Quentin Fottrell:

The unexpected surge in new housing construction may have helped boost stocks Tuesday, but some analysts say neither investors nor homebuyers should be too encouraged by the news.

U.S. home building climbed to the highest level in 19 months during November and construction permits grew, according to data released this morning by the Commerce Department. Home construction in November rose 9.3% to a seasonally adjusted annual rate of 685,000 from October. Investors reacted favorably to the news as the Dow Jones Industrial Average closed up 337 points – or 2.8% — erasing Monday’s losses; the index is now up over 4% since the start of the year.

There are also ways to invest in this building boom without a mortgage, experts say. Some pros are advising their clients to invest in building stocks to take advantage of the rise in construction. “Investors could buy shares of homebuilders that specialize in starter homes in up-and-coming areas,” says Charles Sizemore, a financial adviser in Dallas, Texas. He recommends DR Horton ($DHI), “because it is large, diversified, and has a more sophisticated management than many smaller homebuilders,” and Ryland ($RYL), “because of its focus on affordable homes in growing markets.”

To read the full article, see “Homebuilding Strong, but Housing Shaky.”

When looking at the housing market and looking for investment opportunities, there are a couple things to consider:

1. Any improvement at all in housing is cause for at least modest celebration.  Housing, or more accurately the debt associated with housing, remains the largest obstacle to a sustainable U.S. recovery.
2. That said, one month of data does not make a trend; this could end up being nothing more than statistical noise once all is said and done.
3. The strength in rentals is not surprising.  Demographically, we have a lot more renters than buyers right now.  American births had a mini-boom that peaked in 1990.  Those babies born in 1990 are 21 today, graduating from college, and needing apartments.  Expect rental demand to remain strong for several years.
4. These same demographic forces mean big demand for starter homes in the years ahead, particularly in the cities attracting all of those recent college graduates.
5. The market for “trade-up” homes should remain weak for a long time to come, as demographically there are few buyers coming down the pipeline.

As investors, it’ not particularly easy to capitalize on these trends unless you’re willing to buy physical property.  Buying a portfolio of depressed starter homes with the intention of renting them for, say, five year and then selling for a profit would be a good strategy.  But this is not something you can do in your company’s 401k plan.

You could buy shares of homebuilders that specialize in starter homes in up-and-coming areas, but you should expect a bumpy ride.  Until something resembling a resolution comes out of the Euro sovereign debt crisis, the markets will be volatile and homebuilders will give most investors heartburn with their volatility.  So, if you decide to invest in homebuilders, make sure that you have some kind of risk control in place, whether it be a stop loss, a trailing stop, or some other strategy.

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