Builders First in Line to Capitalize on Housing Recovery
Continued signs of stabilization in the market, from a reversal of falling home price to a tightening in credit spreads, have analysts optimistic about the builders' future. Combine that with the likely prospect of continued aggressive government intervention and it makes for a potent recipe in the industry.

"The real estate companies, especially the home builders, are adapting to a new environment, and that's an environment where credit isn't as loose as it used to be," says Steven M. Roge, portfolio manager at the Roge Partners Fund in Omaha, Neb. "Certainly that's going to be a change from what a lot of these home builders are used to, but I don't doubt their ability to adapt."

Since the housing market began to collapse in 2007 builders have worked feverishly to recover.

They've cut inventory, stopped speculative building and slashed prices as consumers with little credit availability were pushed out of the new-home market.

But in that time mortgage rates have turned lower, prices in most markets have stopped their freefall and sales of new homes have started to recover.

August data shows new home sales increased 0.7 percent which, though below expectations, cheered investors because the group managed to continue the winning streak it began four months previous. Given a corresponding drop in inventory, analysts have suddenly grown bullish again on the building industry.

"Given our outlook for demand to continue to slowly recover over the next 24 months, combined with supply becoming less elevated, we reiterate our positive sector stance," JPMorgan Chase analyst Michael Rehaut said in a recent analysis.

The firmis overweight three of the five large-cap builders it covers—KB Home , Lennar and Toll Brothers.

Similarly, Goldman Sachs recently upgraded the entire sector to "attractive," citing the positive environment in the industry that it believes will lead to greater sales activity.

The firm projects sales to grow 50 percent in the next two years and believes government programs also will give the industry a boost.

"Additionally, we give a greater than 50 percent probability of a federal tax credit extension which should allay fears of a 'double dip' in housing," the brokerage wrote in a note to clients.

Finally, New York broker-dealer Oscar Gruss initiated coverage on the group this week, saying it's time to "go long homebuilders" and opened D.R. Horton and KB Home with "buy" ratings.

"We recognize that most investors remain skeptical about the prospects for any sort of near-term housing recovery, especially given the rise in mortgage delinquencies and foreclosures," analyst Jeffrey R. Laverty wrote. "However, we would caution investors not to draw too many comparisons between the still-sluggish markets for existing homes and the improving conditions in new home construction.

"Indeed, we see a number of reasons to suggest that the recent strength in new home building activity is both legitimate and sustainable."

Investor Options



For investors, there are a multitude of ways to capitalize on the trend aside from simply buying builder stocks.

Real estate investment trusts, mutual funds and exchange-traded funds offer an array of opportunities, though investors need to be selective.

The opportunities to invest in home builder REITs are mostly indirect because of the requirements attached to the investment vehicles.