Is This Conclusive Evidence of a Housing Turnaround?

The nascent housing recovery began as a whisper but now appears to be turning into a roar.

On Thursday, the once-mighty homebuilder Hovnanian (NYS: HOV) shocked the market with second-quarter earnings of $0.25 a share. By comparison, analysts had predicted the company would lose $0.14. While these results don't singlehandedly prove that the housing market has turned a corner, they add to a growing chorus of evidence that the worst of the downturn may indeed be behind us.

A growing chorus of evidence
For a turnaround to be under way, of course, the housing market must have already hit bottom. Morgan Housel argues convincingly that it has. After an insane spike over the last decade, nationwide home prices are now back to the long-run average after adjustments for inflation. According to Zillow (NAS: Z) , an online depository of real estate data, it's now cheaper to buy a house than to rent one in most metropolitan areas. And the monthly supply of homes is at its lowest rate since 2006.

In addition, and also noted by Morgan, all of the evidence suggests that the housing market is primed for a rebound. A 30-year fixed rate mortgage is cheaper now than it's ever been. The Housing Affordability Index, which incorporates median income, home prices, and interest rates, is higher than it's ever been. And the relationship between nationwide home prices and median household income is significantly more favorable than it has been in the past.

So is a turnaround under way? Although it's still early in the cycle, it appears so. Single-family housing starts are up 22% year-over-year. The Case-Schiller index has increased now for five consecutive months. And as Dan Dzombak noted, the National Association of Retailers' housing market index recently rose to 37, its highest level since the beginning of 2007.

There's also evidence of a recovery on the housing market's periphery. Take Home Depot's recent earnings release. The home improvement retailer's second-quarter net income increased 12% year over year to $1.53 billion, or $1.01 per share, beating analysts' estimates of $0.97. Furthermore, the company updated and upgraded its guidance for the remainder of the year, anticipating a 19% jump in profits to $2.95 a share.

Beyond Home Depot, many other companies in the home-improvement space are performing admirably as well. As Alex Planes recently observed, multiple stocks in the sector are at or near 52-week highs, including paint manufacturer Sherwin-Williams and both PPG Industries and Valspar. According to Alex, assuming that a housing recovery is indeed under way, "all of these stocks should be able to sustain further growth in the years ahead."

So what should you do?
There are a couple of different ways to attack this. The first is a generalist approach recommended by our in-house technology analyst Andrew Tonner. For those of you who aren't experts in this area, Andrew both owns and suggests the iShares Dow Jones U.S. Home Construction Index, an exchange-traded fund which tracks the performance of the home construction sector of the U.S. equity market. Along these same lines is the iShares Dow Jones U.S. Real Estate Index, an ETF which tracks the performance of companies that hold and/or develop real estate.

My colleague Amanda Alix, on the other hand, recommends a more tailored approach. According to a recent Bloomberg article, railroads are shipping more lumber destined for homebuilding, purportedly even taking railcars out of storage to do so. Amanda thus recommends creating a position in timber REITs such as Weyerhaeuser (NYS: WY) , Rayonier, Plum Creek, or Potlach, all of which she claims are "seeing gains from the burgeoning housing revival."

A final and more direct approach is to invest directly in real estate itself -- or at least as directly as the equity markets permit. You could do so by purchasing stock in homebuilders like the aforementioned Hovnanian, PulteGroup, or Lennar. Or if you're also on the hunt for a large dividend payout, any number of mortgage REITs may fit the bill. Two of the most popular are Annaly Capital Management (NYS: NLY) and Chimera Investments (NYS: CIM) , which yield 12.6% and 14%, respectively -- though, buyer beware, as high dividend yields are typically indicative of high risk.

Foolish bottom line
Whether a housing recovery is under way or not will only be obvious in hindsight. At that point, however, any stocks that stand to benefit from the trend will have already taken off.

It's for this reason that I urge you to download our in-depth report on Annaly Capital Management, one of the high-yielding stocks mentioned above. Among other things, the report details the opportunity associated with Annaly, the disturbing risks that every investor in the company must be aware of, and why a housing recovery could also cut the other way. To read this pivotal report, simply click here now.

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Fool contributor John Maxfield does not have a financial position in any of the companies or securities mentioned above. The Motley Fool owns shares of iShares Dow Jones US Home, Annaly Capital Management, Zillow, and Weyerhaeuser.Motley Fool newsletter serviceshave recommended buying shares of Sherwin-Williams, Annaly Capital Management, Zillow, and The Home Depot. The Motley Fool has adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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