Forget homebuilders: These are my favorite housing recovery stocks

The housing market.

Enough said, right?

There’s still an intense supply shortage of available homes. And even if there wasn’t, mortgage rates remain as high as 6.75% while the average single-family home price is a whopping $446,400.

So, yeah. The housing market.

Even so, there are glimmers of good news. For instance, according to mortgage technology provider Optimal Blue, the number of locked-in mortgages for home purchases hit its highest level last month in over three years. It also jumped 10% month over month and 14% year over year.

In which case, things may finally be stabilizing.

Note that last word: “stabilizing.” I didn’t say another housing boom is seconds away. I’m actually quite certain it will take some time to see any such thing.

But investors can nonetheless take advantage of even the earliest stages of a real upswing – which I do believe we’ve reached. This is especially true now that the 21st Century ROAD to Housing Act is official law (albeit without President Trump’s signature).

That legislation, the most comprehensive federal housing reform passed in a generation, aims to:

While it will take years for all of that to fully work its way into the American economic fabric – and despite my objections surrounding its attack on single-family rental landlords – it’s still an overall positive foundation to build on.

Knowing all that means we have the chance to get in on a housing turnaround before the headlines clue everyone else in.

This early on though, I’m not interested in trying to predict which homebuilder will sell the most houses or make the most money five years down the road. Instead, I want to focus on businesses that will benefit from all of them.

And sooner than later, too.

The homebuilding story starts long before a foundation is poured… or a property is bought to pour it on… or even an idea occurs to buy that property.

It begins with a tree in a forest. Twenty to 40 of them, actually. That’s how much it takes to build the average American home.

As such, real estate investment trust (REIT) Weyerhaeuser (WY) is almost automatically set to profit from any uptick in housing builds. Its 11 million acres of premium U.S. timberlands make it one of the largest non-governmental forest owners in North America.

Weyerhaeuser’s stock is down right now thanks to the current homebuilding situation. But that hasn’t stopped it from growing its products all the same.

Trees continue to grow regardless of the economy. And if lumber prices weaken or demand otherwise falls, management can just delay harvesting. In which case, the trees just go on growing in height, width, and value.

Few businesses have that kind of luxury.

Better still, the kind of trees that can be turned into lumber are limited. They’re renewable. And they can’t be replicated by artificial intelligence (AI), making them a heavy asset, low obsolescence (HALO) play – a topic I covered last month in The Wide Moat Show.

In which case, Weyerhaeuser is more than prepared for housing activity to normalize – even if the market doesn’t recognize that yet.

Weyerhaeuser boasts one of the highest operating margins in the timber sector, positioning it to generate significant operating leverage as end-market demand recovers. If housing starts, repair and remodeling activity, and commercial construction all begin to rebound, earnings could accelerate much faster than many investors expect.

With an enterprise value of approximately $23 billion, WY currently trades at just 10.7x cycle-adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). That’s an attractive valuation for a company with world-class timber assets and substantial embedded operating leverage.

As shown below, Wall Street expects free cash flow to increase by 83% next year, highlighting the REIT’s powerful earnings potential as the housing cycle normalizes.

I learned early on in my commercial real estate (CRE) development days that securing buildable land can be challenging. There are entitlements to navigate, environmental studies to conduct, zoning approvals to secure…

The list goes on from there.

So a company like Millrose Properties (MRP) that already has ready-to-develop land is a beautiful thing. And it will become even more attractive once the housing market starts to improve, much less take off.

As I wrote in early April:

Lennar (LEN) spun it off not even a year and a half ago. Today, that national homebuilder pays Millrose “an 8.5% annual option fee per property. And it’s seeing strong demand from other homebuilders as well.”

Such strong demand, in fact, that the REIT expects to grow its invested capital by $10.5 billion this year alone.

Millrose operates in 933 communities across 30 states, with particularly noteworthy positions in Charlotte, North Carolina; Charleston and Greenville, South Carolina; and Columbia, Maryland. These areas are either growing communities with lots of homebuying interest… or built-up towns where every available space is that much more valuable.

Millrose is very strategic. Very precise. And very well-positioned to take a leading place in any homebuilder growth to come. As you can see below, we’re modeling Millrose to return around 30% over the next 12 months:

Anyone who knows anything about American Homes 4 Rent (AMH) is fully justified in asking one (or both) of two questions:

The answer to that second question is no, it didn’t destroy SFR landlords. It just complicated their capabilities.

As for the second question, I answered it earlier when I noted how it will take years for the new law to fully impact the housing market. In which case, there will still be a need for millions of families to rent, either by choice or necessity.

And American Homes 4 Rent is one of the highest-quality landlords around.

It primarily holds newer assets located in highly attractive locations in the thriving Sunbelt: the southern swath of the country where economic opportunities are abounding, businesses are relocating to, and families are resettling in.

Moreover, many of these new residents either have money to begin with or are dazzled by the Sunbelt’s lower cost of living. Either way, they’re willing to pay more for a rental home.

American Homes also has scale on its side, complete with:

Since that’s all managed by a leadership team that knows its business inside and out, I remain confident that this REIT will be able to navigate the new legal landscape and still come out ahead.

Shares are trading at just 20x earnings, far below their historical multiple near 25x. American Homes also features a well-covered 3.9% dividend yield and 5% estimated earnings growth for 2027.

All put together, we expect a 24% annualized total return from this REIT.

Like Weyerhaeuser and Millrose, American Homes 4 Rent might not be the most direct housing market play. But I believe all three are well-positioned to take advantage of the slowly but surely changing situation.

You can buy up traditional homebuilders if you’d like. I’ve recommended them more than once in the past.

However, I think the more immediate profits will go to the industries that support them… and alternatives like American Homes that will remain necessary for some time to come.

Happy SWAN investing,

Brad Thomas
Editor, The Wide Moat Daily

Price is what you pay. Value is what you get.

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