(By Michael Vodicka) Housing was the sector that led the domestic and global economies into one of the deepest recessions in the last 80 years. But now, after 6 long years of a prices falling lower, the market is showing big signs of recovery.
The latest read on the S&P/Cash Shiller Home Price Index shows that in 2012, prices were up 6.8% nationally, the best gain since 2006.
That big rebound in one of the most beaten down asset classes has had a profound effect on many segments of the market.
With home values increasing, consumer confidence got a nice boost, lifting the Consumer Discretionary Select SPDR (NYSE: XLY) ETF to an outsized gain of 21% in 2012. Take a look at the market-beating return below.
Rising home values also provided a big boost to the beaten down financial sector, reducing balance sheet liabilities that have plagued the big banks. JPMorgan Chase & Co. (NYSE: JPM) was up 26% in 2012 while Bank of America (NYSE: BAC) doubled with a gain of 100%.
But no other sector saw the gains or upward momentum of housing stocks and home builders. That lifted the iShares Dow Jones US Home Construction (NYSE: ITB) ETF to a massive 75% gain on the year. Take a look at the big rally below.
But the gains from individual home builder and housing stocks have been even more impressive. The group is being fueled not only by fundamentals, strong earnings growth and bullish earnings projections, but also by bullish sentiment, with institutional and individual investors alike swarming into one of the hottest trades on the Street.
And with home prices showing no sign of slowing, the trend is set to continue into 2013.
Here is a list of my six favorite home builder and housing stocks. From that list, I have chosen to highlight DH Horton, Inc. (NYSE: DHI) and TheHome Depot, Inc. (NYSE: HD) because of their bullish growth projections and attractive valuations.
| Company | Ticker | Market Cap | 2013 Growth Projection |
| KB Homes | KBH | $1.4 bln | 111.0% |
| Lennar | LEN | $7 bln | 83.0% |
| Toll Brothers | TOL | $5.7 bln | 40.0% |
| DH Horton | DHI | $7 bln | 22.0% |
| Home Depot | HD | $102 bln | 23.0% |
| Lowes Companies | LOW | $41 bln | 19.0% |
DH Horton, Inc.
DH Horton is a home builder that is up an incredible 50% in just the last year. Those gains have been driven by surging earnings growth, with an average earnings surprise of 73% in the last four quarters. Analysts are looking for more of the same, projecting 22% earnings growth in 2013 and another 50% in 2014. That has shares of DH Horton trading with a PEG (price-to-earnings growth) ratio of just .81 times, a huge discount to its peer average of 1.56 times.
The Home Depot, Inc.
Is a familiar name on the Street as a leading home improvement store. Shares are up 36% in the last year as both earnings and estimates continue to rise. Analysts are looking for earnings growth of 23% in 2013 and another 15% in 2014. But once again, this stock has value, trading with a PEG ) price-to-earnings growth) ratio of 1.2 times, a discount to its peer average of 1.4 times.
Downside: Even though most of the names on the list don't look overvalued, they are trading at multi-year highs, which could encourage early investors to take profit.
Price Target: Housing prices are in position to continue their recent uptrend into 2013. That should have a big impact on home builder and housing stocks, which are coming off a huge 2012. But in spite of those gains, analysts are still projecting robust earnings growth, keeping the valuation picture in check.