It probably didn't seem possible at the time, but 2012 was the year of the homebuilder. Real estate developers took off in a major way, as housing prices bounced back in an improving economy with mortgage rates staying near historic lows.
Investors taking a chance on a rebound in residential construction earlier this year won big, with several of the country's homebuilders more than doubling over the past year, but there are plenty of risks waiting as 2013 greets some of 2012's biggest winners.
Building on a strong foundation
Before we get to the challenges, let's hand out the performance awards for 2012. Here are the seven real estate developers that more than doubled over the past year.
Source: Yahoo! Finance.
There isn't necessarily a regional emphasis here. The money doublers come from all over the country. M/I Homes hails from the uninspiring real estate market in Ohio. Pulte's home state is Michigan. However, most of the developers do have a presence in the eastern and southwestern states that bounced back in a major way in 2012 -- just as those same areas suffered the biggest hits during the downturn.
It's easy to get mesmerized by the heady gains, fueled by Hovnanian's stunning 363% pop. Hovnanian is one of just five stocks in the entire realm of stateside stocks to more than quadruple, with average daily trading volume north of 300,000 shares. However, keep in mind that Hovnanian had such a strong year because it was essentially left for dead when the year began. Even now, Hovnanian has turned a quarterly profit just twice over the past six years.
Each of these companies came a long way in 2012, but that also means that they can go a long way down in 2013 if the recovery comes unhinged.
The challenges that wait in 2013
Where do we go from here?
Home prices have been climbing across the board over the past year, and that's welcome news for homebuilders, with construction costs that march to the beat of a different drummer. A lot of things can still reverse the positive momentum in the industry. Let's look at some of the concerns.
Improvement puts an end to the shakeout: An ironic downside to the upside is that it stops the inevitable shakeout of weak players from taking place. Hovnanian, for example, seemed like a no-brainer to buckle a year ago. It lives on, and so do the many smaller players that would've gone out of business if home prices and demand would've kept shrinking. Many of these stocks are at multiyear highs right now, even though they are selling fewer homes at lower price points than they were when the stocks were previously at these levels.
There isn't a yield mattress here: It's not as if these homebuilders are sharing the wealth of their newfound popularity. More than half of these companies aren't paying out dividends, and just one -- MDC with its current yield of 2.8% -- is yielding more than 1%. Oh, and in an effort to get ahead of the 2013 tax hike on qualified dividends, MDC already paid out all of its 2013 dividends in one-lump sum last week.
It will be hard for mortgage rates to stay low through 2013: If the economy is on track, it will be hard for interest rates to continue to stay this low for too much longer. Yes, it appears as if the housing industry dodged a bullet. The threat that mortgage interest may no longer be deductable no longer appears to be on the table. However, if mortgage rates begin to inch higher, that will mean less bang for the borrowed buck -- and home prices may have no choice but to head lower.
Let's end this on a positive note
None of this means the year ahead will be grim. These companies have taken major strides in beefing up their fundamentals. Pulte posted a loss last year. Analysts see a profit of $0.68 a share in 2012, soaring to $1.14 in 2013. KB Home also lost money in fiscal 2011. Wall Street's targeting modest earnings of $0.10 a share for the fiscal year that ended last month, but holding out for a whopping $1.14 for fiscal 2013 that began this month.
These are companies that shaved costs in the downturn and have sobered up so they don't take ridiculous risks. Many of these developers may not be putting out the kind of numbers that they did when the real estate market peaked a couple of years ago, but they really are in a better place these days.
The risks will be there in 2013, but the same can also be said about the opportunities.
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The article 7 Homebuilders That Doubled in 2012 originally appeared on Fool.com.
Longtime Fool contributor Rick Aristotle Munarriz and The Motley Fool have no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.