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3 Housing Investments Best Suited for a Recovery

The housing market is showing signs of stabilization. The free fall in home prices appears to have ended. Even though foreclosures are on the rise, strong increases in sales are enabling home prices to stage a modest rebound.

Home prices as measured by the S&P/Case-Shiller index advanced 1.4% in June. This marks the second straight monthly gain for the battered housing market.

With home prices showing signs of turning around, it pays to look at leading indicators of supply of and demand for homes to assess whether the bottom can be enduring.

Supply of Homes

New construction as well as foreclosure contributes to the supply of homes.

Issuance of building permits is a leading indicator of new construction activity. There is ample evidence that construction activity is slack. Number of building permits is down nearly 40% on a year-over-year basis.

Foreclosures are however a point of concern. The U. S. foreclosure rate shows no signs of abating. The foreclosure rate could also increase materially if forecasts for a double-digit unemployment rate come true.

Demand for Homes

Pending home sales are a useful leading indicator since they track contract signings. Here the picture is encouraging.

Housing Investments: S&P/Case-Shiller Home Price Index Trend

A turnaround in the S&P/Case-Shiller index augurs well for housing investments and homebuilders.

The National Association of Realtors recently announced that pending home sales gained 3.2% in July. Coming on the heels of a 3.6% increase in June, this marks the sixth straight monthly gain in pending home sales.

With frugality being the new norm for consumers, purchases of smaller sized homes are becoming more common. The average size of new homes is down to 2,065 square feet. The Commerce Department’s data show that sales of new homes costing less than $200,000 accounted for nearly half of all sales in the first half of 2009.

What This Means for Home Prices

As long as the job market doesn’t get much worse and mortgage rates don’t rise too much, home sales should continue to trend upward and help home prices recover further. The strength of the recovery is likely to be subdued and the duration drawn-out as high levels of foreclosures offset restraint on new construction.

Given the above outlook, it is right to get into housing-related investments … but selectively. We believe new starter home builders, home improvement companies, and selected home furnishings makers can prosper as home prices recover.

Homes for First Time Buyers

Housing Investments: First Time Home Builders

Mortgage availability is less abundant than in the go-go days. Added to this, uncertainty on the job front is running high. These factors are working to curb consumers’ appetite for large mortgages. Against this backdrop, the lower-end of the house price spectrum appears more appealing than the higher end.

Shares of lower-end homebuilders offer one way to play the housing recovery. D. R. Horton (DHI) and KB Homes (KBH) are examples of homebuilders catering to first-time buyers.

Home Improvement Companies

Housing Investments: Home Improvement Companies

The backdrop of modestly rising home prices and lower mobility from a slack job market is likely to encourage homeowners to upgrade their homes. Home improvement companies like Home Depot (HD) and Lowe’s (LOW) can fare well in this milieu and offer another means to play the housing recovery.

Home Furnishings

Housing Investments: Home Furnishings

Teeing off the potential for homeowners to upgrade their homes, makers of home furnishings that help to increase the value of homes look appealing as well. Masco (MAS) a maker of cabinets, plumbing products, and paints is an example that fits this bill. Floor covering product maker Mohawk Industries (MHK) is another company that can benefit.


Must-read Articles on Sector Investing

Using Sector Funds to Construct Diversified Mutual Fund Portfolios

High-potential diversified portfolios can be constructed by dividing assets among a group of sector funds. This approach gives the investor flexibility to over-weight or under-weight certain sectors versus broadly diversified indexes. 'Sector funds are too risky.' 'I doubled my money with Fidelity Select Technology in 12 months!' 'Avoid sector funds.' If all of this sounds confusing, you are not alone.

Sector Mutual Funds: How to Pick Winning Sector Funds and Avoid Losers

If you are looking to earn great returns from the stock market sector mutual funds are right up your alley. Sophisticated investors recognize the potential sector mutual funds offer and know how to make such funds work for them. You can consistently beat the market by investing in the right sector mutual fund at the right time. In fact, you can make money even in bear markets.

Sector ETFs: Invest in the Best Sector ETF Consistently

Sector ETFs are among the most potent investment vehicles that allow individual investors to exploit advantages previously available only to large institutions. You can beat the market by investing in the right sector ETF at the right time. In fact, you can actually make money even when the overall market is tanking. However all too often, investors use sector ETFs inappropriately and get their fingers burnt.

New ETF and Mutual Fund Recommendations

ETF Mutual Fund RecommendationsThe Fidelity and ETF Core and Focus model portfolios have gained at annualized rates of 14.6% and 17.8%, respectively since 1994. The model portfolios will be repositioned with new mutual fund and ETF recommendations on Friday, June 28. Learn more about AlphaProfit's Free and Premium Service investment newsletters.

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