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How Real Is The Housing Recovery? 4 Real Estate Stocks To Watch

Wednesday afternoon saw a spike in stock and bond prices, in the wake of Federal Reserve Chairman Ben Bernanke's testimony before the House subcommittee on finance. Bernanke toed a cautious line, reassuring investors that "accommodative monetary policy" will remain in place for the foreseeable future, but also insisting that rates will be augmented if the Federal Reserve meets its goals for inflation and reduced unemployment.  Bernanke's trepidation is understandable – housing prices took a tumble over his suggestion last month that it was time to start paring back the program.  

[Read more from Kapitall:  IBM’s Mixed Q2 Earnings and Other IT Stocks to Watch]

Bernanke's assurance that Federal bond-buying and reduced interest rates will continue is likely to be a boon to the nascent housing recovery – and Bernanke has gone on record as saying that his remarks in June were meant to reduce "excessively risky or leveraged positions" that many worried were contributing to another housing bubble.

Taken together, the testimony (which continued into today) reaffirms the notion that the housing market is on an undeniable if slow upward trend. If Bernanke is right, the real estate and housing sectors are poised for a comeback that could be exciting for investors. With that in mind, we decided to analyze four stocks in real estate, all of which achieved average analyst ratings of Buy or higher.

First on our list and most famous is the Howard Hughes Corporation (HHC), the dominant real estate developer in Houston, Hawaii, and Las Vegas. Houston real estate is booming and developers are struggling to keep up with demand for housing while the firm's other interests, which include the refurbishment of the South Street Seaport in New York City, are promising as well. One hedge fund which has already seen huge returns on its initial investment, Rand Strategic Value, expects the share price to continue to climb into the high hundreds.  

Another housing stock to keep an eye on is Forestar Group Inc. (FOR), which is due to release its second quarter earnings early next month. The firm holds an average target price of $26.00, slightly higher than its current listing at 22.32, but last year the stock returned 75.7% for investors.  

Summit Hotel Properties (INN) stands to benefit heavily from the recovering economy, as travel is expected to cause a spike in the most important statistic for evaluating hotel stocks, revenue per available room (RevPAR). Summit enjoys a lower valuation than many of its competitors, while still projecting 60% growth for the 2013 fiscal year and 20% growth the following year. Analysts attribute the firm's success to careful placement of its hotels in mid-tier cities, as well as a wide array of amenities that are growing increasingly essential to travelers – such as free wi-fi.

One of the more intriguing stocks on our list is Walker & Dunlop (WD), which as of July 16 enjoyed some not-so-prestigious press coverage as one of the most shorted stocks in the Russell 3000. The company's debt-ratio - the ratio of debt to assets - is high at 60%, making the company leveraged and risky, but analysts are still listing the stock as a moderate buy, possibly underscored by strong insider-buying of Walker & Dunlop shares.    

The immediate impact of Bernanke's testimony is clearer than its long-term implications, as the Chairman was hesitant to offer specifics and is widely expected to step down this January. There is always the possibility that his replacement could try to take the Fed in an entirely different direction. Some analysts are also concerned about rising mortgage rates in particular, citing them as a possible deterrent for potential homeowners. However, Bernanke's overwhelming assertion remains – that recovery is palpable, and should continue provided Congress avoids any disastrous stand-offs such as the 2011 debt-ceiling debacle.

The List

Analyze These Ideas:   Access a  performance overview  for all stocks in the list.

For an interactive version of this chart click on the image below. Average analyst ratings sourced from Zacks Investment Research. 

Do you think changes in the housing recovery – real or leveraged – will affect these stocks? Use this list below as a starting point for your own analysis. 

1. The Howard Hughes Corporation  ( HHC ):A real estate investment and development company, engaging in managing, developing, and leasing commercial, residential, and mixed-use real estate. Market cap at $4.54B, most recent closing price at $114.99.

2. Walker & Dunlop, Inc.  ( WD ):Provides commercial real estate financial services for owners and developers of commercial real estate in the United States. Market cap at $636.15M, most recent closing price at $18.95.


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