Where to Hunt for Home Builder Value: Analyst
Despite an improving U.S. housing market and firming prices, it's going to be difficult to achieve what is already priced into the stocks, which skyrocketed last year, says one analyst.
"The rebound is in place," said David Goldberg, a home builders and building products analyst at UBS. "Things are getting better in housing. It's really a supply issue in the market right now. There's not a lot of inventory on the ground, and there's still a lot more room for sentiment to run. There's just a lot baked into the stocks right now."
On Tuesday, U.S. home builder sentiment ticked slightly lower to 46 after nailing a seven-year high of 47 last month. A reading of more than 50 indicates that more builders view conditions as good than poor.
The ho-hum report follows a surge in home builder stocks in 2012. During the period, the companies' shares rose 122.8 percent compared with a 13.4 percent rise in the S&P 500, according to KBW analysts.
"We've been telling investors that if you want to be long housing right now, you've got to go to the higher beta names, names like Beazer, Hovnanian — the names that are a little further out on the risk curve — because a rising tide will lift all boats so you want to kind of go with the high-beta names," Goldberg said. "There's a lot baked into some of the safer names now, so we're on the sidelines generally."
Goldberg forecast a rise in growth in multifamily housing and the rental population.
"I think really the biggest constraint on the housing market rebound or really a robust housing market rebound now is coming from mortgage constraints," he said. "Underwriting's become a lot more normalized. It's tough to get a mortgage if you have marginal credit right now, so I think there is going to be a lot of demand in the multifamily market for rentals, especially as household formation continues to accelerate."
He also sees potential for price growth in the new home market due to affordable prices, low 30-year fixed mortgage rates and a lot of purchasing power for consumers.
"I think you could have very, very significant home price appreciation," he said. "We're baking in about 5 to 7 percent in most of the modeling we're doing, but it could be more significant than that."
—By CNBC.com's Katie Little; Follow on Twitter
Additional News: Home Builder Confidence Falls, First Time in Nearly a Year
UBS has a business/banking relationship with and maintains a company holding of Ryland, Pulte Groupe, Meritage and KB Home.