NEW YORK (TheStreet) -- Homebuilder stocks have made many investors happy this past year with the homebuilder index delivering a 48% total return. However, that has changed since May 15 when the group began to slide, losing 10% in value over six weeks. The concern over rising rates has caused many to sell those positions over fears of slowing orders but these analysts seem to agree that the group has more life left in it.
Goldman Sachs (GS) just initiated coverage on the group and splits its opinion. Analyst Eli Hackel thinks there will be modest upside (13%) to the homebuilder stocks over the next 12 months, but doesn't believe that all home builder stocks will rise equally. He advises buying builders that are exposed to markets with the best growth potential, which seems like good common sense. He also suggests buying the higher end because these people will have better access to getting mortgages and selling the lower end of the market. Those buyers will have more difficulty in obtaining a mortgage in this new tightened environment. Hackel does not believe rising rates will slow down the housing rally.
Jay McCanless of Stern Agee mentions higher interest rates in his recent research, but he too believes it won't hurt the overall trend. He thinks the negative psychological effect of rising rates will pull down homebuilder stocks temporarily and he sees this as a buying opportunity. However, the two analysts disagree on which homebuilder stocks are buys. McCanless' top picks include D.R. Horton (DHI), Meritage Homes (MTH), Pulte Group (PHM), and Ryland Homes (RYL). He also has buy ratings on the newly public Taylor Morrison (TMHC)and NVR (NVR).
Hackel's top picks also include Meritage, but he likes Ryland and Toll Brothers (TOL). Unlike McCanless, he thinks Pulte is a sell along with Hovnanian (HOV). Hackel believes that first-time homebuyers have too much risk associated with them and suggests there could potentially be regulatory changes to first-time buyers. College graduates making more than $120,000 tend to be common purchasers of high end homes, look less likely to be unemployed, and are more likely to buy a home like a Toll Brothers home.
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