The U.S housing market is still going strong, according to the S&P Case-Shiller Index of property values in 20 major cities in the United States. The price index, which gauges the health of the domestic housing market, rose 9.3% year-on-year in the three-month period ending in February. That jump, which exceeded the median analyst forecast of 9.0%, represents the index’s biggest year-on-year increase since October 2005.
Analysts believe that if home prices continue to rise, then homeowners may be encouraged to put additional properties on the market. Meanwhile, mortgage rates are still near historic lows, and a steadily improving labor market is boosting the demand for residential real estate. In addition, the U.S. Commerce Department recently announced that sales of new single-family homes were sold at an annual pace of 417,000 in March, finishing off the industry’s busiest quarter since 2008.
For investors, this means that it is an opportune time to invest in housing market stocks. Here are three good choices that cover timber, new homes and home improvement, respectively — Weyerhaeuser Company (NYSE:WY), D.R. Horton, Inc. (NYSE:DHI) and The Home Depot, Inc. (NYSE:HD) — which will all continue growing as long as the housing market keeps improving.
Before we can even talk about houses, we need lots of timber. Weyerhaeuser Company (NYSE:WY) is one of the largest owners of timberlands in North America, directly controlling over 6 million acres in the United States and managing another 14 million acres under long-term licenses in Canada. With 20 million acres of trees, the company is a direct beneficiary of the growing housing market in the United States.
Weyerhaeuser Company (NYSE:WY)‘s first quarter earnings, its strongest since 2005, directly reflect that demand. The company earned $0.26 per share, up from $0.08 in the prior year quarter and topping the Thomson Reuters consensus estimate by three cents. Revenue soared 31% to $1.95 billion, also beating the $1.87 billion that analysts had expected.
Revenue from its wood products segment, the company’s biggest business division, rose 54%. Its timberlands business grew by 18%, cellulose fibers sales were nearly flat, and real estate (single-family homebuilding) sales rose 43%. The company’s gross margin increased from 13.7% to 21.4%, despite a 19% increase in input costs.
Looking ahead into the current quarter, Weyerhaeuser Company (NYSE:WY) expects higher sales volume for all its product lines, but also anticipates slightly higher raw material costs and lower selling prices for certain products, such as cellulose fiber and lumber. A look at its top and bottom line growth over the past three years reveals an extremely bullish growth trend.
Investors shouldn’t be worried about that dip in earnings per share, which was caused by the company’s conversion to a REIT (real estate investment trust), which allows it to be taxed at 15% rather than the normal corporate tax rate of 35%. In exchange for this tax status, Weyerhaeuser Company (NYSE:WY) must pay out a large amount of its earnings per share as dividends. That means that in addition to strong growth fueled by the housing market, investors also get paid a decent quarterly dividend of $0.20 per share.
The next step up after timber is finding the right homebuilder. D.R. Horton, Inc. (NYSE:DHI), the largest U.S. homebuilder by volume, recently soared to a six-year high after reporting a hefty second quarter that also reflected the robust growth of the housing market. The Fort Worth, Texas-based company sold 5,643 homes during the second quarter, up from 4,240 in the prior year quarter. Its order backlog also rose to 7,879, up from 5,899. D.R. Horton, Inc. (NYSE:DHI) finished the quarter with 15,800 finished homes and 175,000 land lots in its inventory.
Those big sales numbers helped D.R. Horton, Inc. (NYSE:DHI) earn $0.32 per share for the quarter, up from the $0.13 per share in the prior year quarter and topping the consensus estimate of $0.19 per share. The company’s homebuilding revenue, which excludes its financing arm, rose 48.6% to $1.39 billion. The company attributed its big gains to low mortgage rates, increased job opportunities and lower fuel costs for transportation of raw materials.
D.R. Horton is focused on buying up land faster than its rivals, since it expects land prices to continue rising in the United States. During the second quarter, the company spent $460 million on new land purchases as average land prices rose by 14%. If land prices continue to rise throughout the second half of 2013, then D.R. Horton, Inc. (NYSE:DHI)’s strategy will have reduced costs significantly.
D.R. Horton’s price has risen 35% since the beginning of the year, handily outperforming the S&P Supercomposite Homebuilding Index’s 18% gain. D.R. Horton, Inc. (NYSE:DHI) and its biggest rivals, PulteGroup and Lennar, have all outperformed the broader market over the past year, despite lagging it until mid-2012.