William Lyon Homes has a healthy supply of lots in some of the hottest real estate markets, according to Citigroup, which initiated coverage of the homebuilder Tuesday with a 'buy' rating.

William Lyon's U.S. operations are concentrated in five markets, Arizona, Nevada, South California, North California and Nevada. About 56 percent of its housing inventory is based in Arizona.

"We expect US new home sales, prices, and related housing activity to recover to normal, mid-cycle levels within the next few years," wrote analysts Will Randow and Scott Schrier in a note to clients. William Lyon is "locked and loaded with 12 years of lot supply in fast recovering markets."

One of the hurdles for homebuilders, and the reason why housing prices are rising so quickly, is lack of new homes as competitors vie for a limited number of high-quality lots of land.

Controlling that land is a huge advantage right now, given rapidly rising prices.

On Tuesday, the Commerce Department is expected to report that sales of new homes rose in May, possibly at their fastest clip in five years.

Economists forecast that sales reached a seasonally adjusted annual rate of 462,000 in May from 454,000 in April, according to a survey by FactSet. That pace that would be the fastest since July 2008.

Despite a recent rise in mortgage lending rates, analysts at Citigroup believe that the housing market recovery will remain intact. They estimate that US home prices are still more affordable compared to the 15-year average.

And earnings from homebuilders are supporting that view.

Early Tuesday, Lennar Corp., the country's third-largest homebuilder, topped Wall Street expectations for the second quarter. CEO Stuart Miller that demand in all of Lennar's markets continues to outpace supply.

William Lyon posts its second-quarter earnings in early August.

Analysts at Citigroup initiated their coverage with a target share price of $28. William Lyon closed at $23.96 Monday.

 

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