After the financial meltdown of 2008, market confidence in the real estate sector became close to non-existent. The mortgage rates which were falling slowly before 2008 fell even more after the financial meltdown. The economic recovery, coupled with the historically lower mortgage rates, is fueling new demand for homes.
Source: Standard and Poor’s
The above chart shows the S&P Case-Shiller 20-City Composite Home Price Index. The index measures the value of residential real estate in 20 metropolitan areas of the United States. Home prices fell after the financial meltdown of 2008 and were static from the period 2010-2012. In recent months, we have seen the index rise as the housing markets start to generate higher activities, showing renewed confidence of the public in this sector.
Residential construction companies are surely going to benefit from the coming changes in the real estate markets. These companies survived the 2008 financial meltdown, but took huge financial losses. Only recently have these companies been able to show signs of growth in revenues and profits. Meritage Homes Corp (NYSE:MTH), Standard Pacific Corp. (NYSE:SPF), and D.R. Horton, Inc. (NYSE:DHI) are three companies that have operations in the residential construction business. Let’s analyze which one these three companies would be a solid investment.
Strong performance from Meritage
The company builds and sells first family homes. Its operations are centered around the southern, western, and the southeastern United States. In its 1Q13 financial reports, Meritage Homes Corp (NYSE:MTH) reported that, on a YoY basis, its home orders and home closings improved 35% and 39%, respectively. This positive change in the company’s performance was reflected in the YoY diluted EPS growth of Meritage Homes Corp (NYSE:MTH). The diluted EPS changed from $(0.15) per share to $0.32 per share.
The future of the company seems bright as backlogs improved 89% on a YoY basis. This means that real estate customers have now enough money and confidence to make their purchases. Due to the higher confidence, Meritage Homes Corp (NYSE:MTH)’s management also expects that home closing revenue would increase 40% in the upcoming quarters. From a holistic point of view, Meritage Homes Corp (NYSE:MTH) is enjoying the economic recovery in the United States and its future looks bright. I would give a Buy recommendation for this company.
Quality focus leading to growth for Standard Pacific
As mentioned before, house prices in the United States have been increasing. Standard Pacific Corp. (NYSE:SPF), in its 1Q13 financial results, reported that the average selling price of its houses increased 9%. Its $355 million in sales in the first quarter was a YoY increase of 61%. The company also experienced an increase (on YoY basis) of 48% in its home deliveries.
The company has also completed its acquisitions of select business assets from Centerline Homes’ homebuilding affiliates. The acquisition should prove very beneficial for the company as approximately 3,000 home sites, in Florida and the Carolinas, would come under its control. Standard Pacific Corp. (NYSE:SPF)’s CEO, Scott Stowell, was excited about the acquisition, stating that the move would bolster the company’s growth strategy by increasing the company’s land supply, community count, and move-up in several profitable markets.
Centerline Homes has a great reputation of building high-quality homes with a focus on customer service and solid product execution. I am very confident about Standard Pacific Corp. (NYSE:SPF)’s ability to produce great returns in the future and because of that, I would give a buy recommendation.