Rising Home Prices Should Drive Stocks of Home Builders

New home
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Home prices rose 12.4% again in August, compared with the same month a year ago, for a 18th consecutive monthly year-over-year gain, according to research firm CoreLogic Inc. (NYSE: CLGX). Home prices rose 0.9% from July to August, half the growth rate from June to July. The data include sales of distressed properties, and the index is a non-seasonally adjusted three-month weighted average.

Excluding distressed sales, August prices rose 1% compared with July, and the year-over-year price rose by 11.2%. Home prices remain 17.1% below their April 2006 peak when distressed sales are counted, and 12.6% below the peak when distressed sales are excluded.

In the past month, shares of Toll Brothers Inc. (NYSE: TOL) have risen about 6%, although the shares are flat since the beginning of 2013. Shares closed at $32.43 on Monday, and the consensus price target from Thomson/First Call is around $36.50, indicating an implied gain of 12.5%.

PulteGroup Inc. (NYSE: PHM) saw shares gain more than 7% in September, but the stock is down about 9% for the year to date, after peaking in mid-May. Shares closed at $16.50 on Monday. The consensus price target is around $19.90, for an implied gain of nearly 21%.

D.R. Horton Inc. (NYSE: DHI) shares gained less than 1% in September, but the stock is up nearly 3.5% since the beginning of the year. Shares closed at $19.43 on Monday, and the consensus price target is around $24.10, for an implied gain of 24%.

Rising home prices also affect the home improvement stores. Home Depot Inc. (NYSE: HD) stock is up about 2% in September, while Lowe’s Companies Inc.’s (NYSE: LOW) stock is up more than 4%. Since the beginning of the year, Home Depot is up about 23% and Lowe’s is up about 34%. As home values increase, it makes sense for homeowners to update and remodel their homes, whether to sell or to add value for potential sale sometime down the line. Add in the fixing up that buyers do on new purchases, and these stocks have more ways to win than do the home builders.

Home Depot’s shares closed at $75.85 on Monday, and the consensus price target is about $86.00, for an implied gain of about 13.4%. Lowe’s stock closed at $47.61, and the consensus price target is around $49.60, for an implied gain of just 4.2%.

CoreLogic expects September housing prices to rise another 12.7% year-over-year and to rise by 0.2% month-over-month. Excluding distressed sales, CoreLogic’s year-over-year increase for September is forecast at 12.2%, and the month-over-month estimate is forecast to rise by 0.7%.

The company’s CEO noted:

After a strong run, the rate of home price appreciation slowed in August. In addition to normal seasonality, the recent sharp rise in mortgage rates off their historic lows was a clear driver behind the slowdown. We anticipate moderate gains in home prices over the balance of this year, supported by the recent downward trend in rates and continued tight supplies of homes in many markets.

Including distressed sales, August year-over-year home prices rose the most in Nevada (prices up 25.9%), California (23.1%), Arizona (16.4%), Wyoming (15%) and Georgia (14.8%). The states with the smallest gains were New Mexico (1.54%), Vermont (2.08%), Delaware (2.51%), West Virginia (2.62%) and Kentucky (2.73%). No states experienced a year-over-year price decline in August.