New homes sales dropped by more than 13 percent compared with a year ago and analysts began to question whether the housing market is really recovering. Whether it is or not, some homebuilders look extremely attractive as investments.
New home construction has slowed dramatically. The number of new homes being built collapsed almost 75 percent in the market crash.
Although sales dropped sharply in July, Commerce Department data indicated that the bear market in residential real estate has likely ended.
The new homes sales report showed a drop in the inventory of homes for sale. In particular, the median time to sell a new home fell to 3.5 months, falling below four months for the first time since the housing bear market started.
While there is surprisingly little research on bear markets in real estate, one researcher found, "Since 1960, past real estate bear markets ended when new housing inventory was below five months, and the median length of time to sell a new house declined to four months.”
Inventory is still above 5 months (at 5.2 months), but the median sales price of new homes is at a record high. The recovery might be slow, but companies that survived the downturn have demonstrated an ability to operate under any economic conditions.
Two builders that standout as potential bargains are Ryland Group (RYL) and Toll Brothers (TOL). Value investors often look at price/earnings to growth (PEG) ratios, which compare the price-earnings ratio with earnings growth rates.
A PEG ratio of 1 is considered to be fair value. With a PEG ratio of 0.17, RYL is among the cheapest stocks in the market. TOL is also undervalued by this measure, with a PEG ratio of 0.7. Both stocks are buys at current levels.
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