Housing: A Secular Opportunity?

We think the time has finally come for the U.S. housing market to get beyond its false starts and begin a multiyear boom that could benefit investors. Low interest rates, demographics and a solid economy should provide staying power for a resurgent housing market.

For advisors seeking to capitalize on potential housing growth, the obvious sector to explore is home builders, but there are other more subtle ways to invest in the trend. We believe the housing boom will endure. But our focus has been on identifying undervalued stocks with idiosyncratic factors that should benefit from the upswing.

It’s Not Just Starter Homes

While much of investors’ focus has been on first-time buyers, the high end of the market is also showing strength. Move-up homes in the $500,000 to $749,000 range year-to-date have enjoyed the largest growth in sales with an increase of 47% year over year, according to industry estimates.

Same Business, Different Approach

By holding multiple home builders operating in 12 states, our firm, Heartland Advisors, is attempting to blunt the risks of investing in single regions. The housing companies we invest in also specialize in different types of properties. One of our longtime investments, M.D.C. Holdings Inc. (MDC) generates roughly 40% of its sales through first-time buyers, whereas another portfolio holding, WCI Communities (WCIC), focuses on higher-end dwellings in Florida. By owning construction companies with varying target markets, we believe we are able to mitigate the risk tied to a single demographic group.

At the same time, we seek consistency in our holdings by picking those with attractive valuations.

At 1.16x book value, M.D.C. is trading at a nearly 32% discount to its peers and features a 3.4% dividend yield when the industry average among North American builders is 0.5%. Additionally, on a price-to-sales basis, the stock is trading at just 80% of its counterparts. We’ve been longtime owners of the company, which operates under the Richmond brand, partly because of its conservative approach in the space.