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TheStreet Open House

5 Homebuilder Stocks With the Brightest Outlook for 2012

BOSTON ( TheStreet) -- How could anyone bet on the housing industry when a national headline Tuesday exclaimed "Home Ownership Heads to New Lows" even as prices today are a third less than at their peak five years ago?

But residential-construction stocks are coming to life, gaining 6.5% in the past three months, with five of the biggest companies producing double-digit returns, according to Morningstar. The broader S&P 500 Index has risen 1.9% in the same period. For all of 2011, homebuilder stocks are down 26% versus the benchmark index's 3.4% decline. Still, something's at work here.

Back to the bad news: Standard & Poor's analysts said Tuesday that home prices across the nation are now right back to where they were in the second quarter of 2003, dispiriting news for potential investors.

Nevertheless, the "smart money" in the form of institutional investors, such as mutual funds, are buying homebuilder stocks heading into 2012. They're selecting the few that survived the worst housing-market decline since the Great Depression.

And the economy has been tossing the housing sector's prospects the occasional bone as well. For example, new-housing starts surged 15% in September to the highest level in 1 1/2 years, according to the Commerce Department.

A slowly recovering economy after a recession and a decade of overbuilding contributed to the worst housing-market conditions in a generation, and that, coupled with high unemployment, low consumer confidence, tough new lending standards and banks' reluctance to lend have hamstrung the industry over the past few years.

But record-low interest rates, and an outlook that things can't get worse than they are now, has boosted the fortunes of the homebuilding industry.

"Following historical precedent, the currently depressed housing market holds high potential for a dramatic rebound in the coming years, providing a major upside opportunity," Morningstar analysts write.

But they throw in the catch-all caveat: "While we expect a long, bumpy bottoming for this industry, an eventual major rebound in housing demand sometime in the next several years looks all but certain."

The question is how long can an investor hold out versus, say, a huge mutual fund that can afford to sit and wait?

Here are the five leading homebuilders and what analysts are saying about them:

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