PulteGroupand Lennarhit new 52-week highs on Tuesday, as homebuilders showed signs of strength.
“The housing recovery back-to-normalization trade is finally here,” Nishu Sood, Deutsche Bank homebuilder analyst, told CNBC. But he cautioned that the housing recovery is not immune to macro-turmoil.
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“Homebuilders long-term are a great play on housing recovery over a multiyear period,” Sood said. “The strength so far this year has been surprisingly strong. We’ve been bullish and it’s even been above what we’ve expected.”
Although Sood is confident, he explained that job growth is essential to sustain the recent strength of the housing market. If the U.S. loses jobs in the second half of the year, Sood anticipates the momentum of the recovery to take a hit.
So how much job growthis needed to maintain the housing recovery? Sood put the over-under job growth rate around 100,000 to 125,000 a month. He explained that a “muddle-through” rate is all that is needed to continue the recovery.
As the housing market makes a comeback, it could be ripe for investment.
Sood placed “holds” on KB Home,Lennar , and PulteGroup , while his top picks are Toll Brothers and D.R. Horton.
“The basis for our recommendations is viewing the homebuilders as land funds,” Sood said. “The ones with the better balance sheets will have more money to invest into a recovery and will therefore have greater volume and EPS growth.”
He cited Toll Brothers as one of the most interesting stocks to watch, noting that its customer base is buying much more expensive homes — a demographic that tends to be more sensitive to stock market volatility, according to a recent Citigroup report.
Despite expectations of market volatility in the back half of the year, Sood said that Toll Brothers’ momentum had continued into June. No slowdown in housing momentum, even at higher ends, is a positive sign for the recovery.
—By CNBC.com’s Madeline Laskoski
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Lennar, Pulte, and Toll are clients of Deutsche Bank. Deutsche Bank and/or its affiliate(s) has received noninvestment banking related compensation. Nishu Sood does not personally own Lennar, Pulte or Toll.