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The US property recovery is here to stay – here’s what to buy

After a long and painful slide, US property prices have started to pick up this year. And this recovery is set to last. Here, Matthew Partridge picks the best ways for you to profit.

One of the biggest advantages the US now has over the UK is that it had a proper housing crash.

It was painful for Americans at the time. But while our market remains stagnant and a drag on the rest of the economy, the US is now seeing clear signs of recovery.

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The S&P/Case-Schiller index of property prices has been rising for six months in a row. Prices were up 6% year on year in October, according to Corelogic.

Sales are rising too. The number of homes sold for more than half a million dollars is up by 40% on last year. And despite the frailty of the banks, even home loan applications are rising.

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So will the recovery continue? And if so, how can you profit?

Why the US recovery will continue

One of the big drivers behind the recent acceleration in the US property recovery is the Federal Reserve. In September, Ben Bernanke announced that the Fed would buy $40bn-worth of mortgage-backed securities until the economy is clearly recovering.

This means mortgage rates should remain low for the next few years at least. That will make it easier for existing homeowners to keep up their payments. It also means those looking to buy a house will have more buying power, assuming they can secure a loan.

This in turn reduces concerns about a new wave of foreclosures (that's American for repossessions') suddenly swamping the market. This shadow inventory' is being held off-market by banks, reluctant to realise losses by offloading it and potentially hitting prices.

However, there is increasing evidence that much of this shadow inventory consists of poorly built housing that has deteriorated badly after all, if no one's been living in it, then no one has been taking care of it. In many cases, these houses will need to be written off and demolished, rather than sold.

There's also the question of demographics. In the past few years, both immigration to the US and its birthrate have fallen. But if the US economy returns to growth, you can expect this to reverse.

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As Roger Altman of Evercore Partners points out, the rate at which the US population increases is expected to go up sharply after 2015. A fall in unemployment, especially for those under 35, will also encourage people to buy rather than rent.

Talk of a housing shortage as some of the most optimistic property bulls have tried to claim is still overdone. But it's clear that supply and demand are more finely balanced than they have been in many years.

At the peak in 2009, there was enough new housing stock to cover a year's worth of demand. Now that figure has fallen to 4.8 months, which is actually lower than the long-term average of five months.

How you can profit from the US property rebound

So how can you profit from this recovery? The most obvious way is to buy shares in housebuilders. If there's more demand for houses, then it makes sense to buy the companies that make them, after all.

There are a couple of problems with this however. For a start, everyone else has had the same idea. We tipped a number of housebuilding stocksearlier this year. Even by then, they'd gone up a lot, and since then they've risen even further.

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On top of that, a lot of these companies remain quite risky. KBH Homes (NYSE: KBH) is still making a loss, for example, and is barely expected to make a profit next year. Meanwhile Lennar Corp (NYSE: LEN) trades at over 23 times next year's predicted earnings, which suggests that it is too expensive.

If you'd still like to buy into the housebuilders, then both Pulte Homes (NYSE: PHM) and DR Horton (NYSE: DHI) seem to offer better value, with each trading at less than 15 times forward profits. However, the fact that Pulte has nearly tripled in value in the last year (from $6 to just under $17), suggests that Horton may be the better candidate.

An alternative is to take a picks and shovels' strategy.

During the California gold rush a few lucky prospectors managed to strike it rich'. However, many more ended up either bust, or with nothing to show for their efforts.

The smartest entrepreneurs of the day were those who figured out that the real money lay not in prospecting, but in selling goods and services to all the new arrivals, eager to try their luck at finding gold.

In the same way, those who sell materials and services to the home construction industry should also do well.

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Universal Forest Products (Nasdaq: UFPI) looks set to benefit from the rise in lumber prices that has accompanied the return of homebuilding. However, it is valued at barely more than book value.

Another option is Koppers Holdings (NYSE: KOP), which focuses on treated wood products. The company is trading at 9.7 times future earnings, and pays out a decent dividend (by US standards) of 2.7%, which should continue to grow.

We'll also be looking in more detail at the role timber can play in your portfolio in the Christmas issue of MoneyWeek magazine, out on Friday 21 December. (If you're not already a subscriber, you can subscribe to MoneyWeek magazine).

Even if you're not especially keen to play a US housing recovery, timber is an asset you should learn more about it's one of the few asset classes that can be considered a genuine diversifier' for your retirement fund.

This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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