The Housing Market Has Bottomed, Here's How to Profit

David Goodboy's picture

Monday, June 25, 2012 - 1:00pm

by David Goodboy

There is no question in my mind that the housing market bottom either already in or is very close. 

I realize this is a bold statement given the dire condition of the U.S. housing market, however I firmly think this is the case. Savvy investors will be able to profit from companies poised to thrive from the pending post-bottom bounce in the housing market. 

Before you dismiss this statement as pie-in-the-sky-idealism, let me explain how I reached this conclusion. 

It may surprise you... 

My investing philosophy is built on buying weakness and following the big money players in any market. Although I will buy momentum, my greatest success has come from buying weakness within defined parameters. Combine the weakness with unmistakeable big money movement into the market and it spells opportunity for observant investors. 

There is a huge move in the hedge fund and private equity sectors right now. That trend is to buy, rehab and rent foreclosed properties. The strong rental market combined with ultra-low prices on foreclosed homes has created a great opportunity in the real estate market. 

The U.S. government is facilitating the trend by allowing the purchase of large pools of Fannie Mae-owned single family homes. As you may expect, edge-hungry funds have seized upon this opportunity and are buying properties in massive quantities across the United States. High-profile funds involved in bulk foreclosure purchases include TPG Capital, Och-Ziff Capital Management, Starwood Capital and Oaktree Capital Management. Even Warren Buffett has expressed interest in this asset class

Drawn by 7% rental yields, appreciation potential and the future possibility of packaging properties into real estate investment trusts (REITs), the big money players are jumping into this market with gusto. In fact, and this is where it gets interesting... There is more money chasing the market than supply. 

There is more than $6 billion right now fighting for a chance at the foreclosure market. Once the foreclosures are snapped up, the funds will likely move into discounted, nonforeclosed homes. This is why I think the housing market bottom is in. The big investors have smelled blood in the water, and by feeding on it, they create the bottom. 

How can stock investors profit from this trend? Here are two stocks I think will benefit from the institutional money flow.

First and perhaps most obviously, existing REITs of residential properties will benefit from the upward price pressure on housing. I like the fundamental and technical picture of Home Properties (NYSE: HME). The company owns more than 37,000 residential units. 

First-quarter growth of 2012 was the highest of any first quarter in the past five years. Not to mention, it recently announced a dividend of $0.66, representing a 4.3% yield. Technically, the price has pulled back into my "value zone" buy region and appears to have found support at $58.

Most, if not all of these foreclosed homes being bought by institutions will need to be rehabbed prior to being converted into income-producing assets. With this in mind, I looked for companies poised to profit from a large scale increase in home rehabbing. 

The company Masco Corp. (NYSE: MAS) fits this description perfectly. Masco manufactures and distributes all sorts of products for home improvement -- everything from cabinets to plumbing and windows. It announced a better than expected first quarter and a 7% sales increase, likely as a result of increased housing activity. This is another stock that just hit my "value zone" buy radar screen. 

The price has dropped during the past few trading sessions, but it remains above the critical 200-day moving average.

 

Risks to Consider: The housing market is very dependent on action taken by the Federal Reserve and what happens to mortgage rates as a result. I strongly think the institutional interest in the housing market is signalling the bottom. However, as in any investment, things can change quickly. Always position size correctly and use stops, no matter how compelling an opportunity.

Action to Take --> Both the above stocks are prime buy candidates in the present trading range. The uptick in housing will only help lift both the candidates higher. But you should look into both of these stocks further, as I have only scratched the surface. Use the 200-day moving average as your stop level for both companies.

David Goodboy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.