As the housing market begins to show signs of recovery, analysts at Goldman Sachs are initiating coverage on a number of housing stocks. They note that the Case-Shiller index shows that home prices are up 9.5 percent year to date and sales of new homes are up 27 percent. Their homebuilding index is also up more than 150 percent from its lows.

Housing Stocks

Four out of five of the biggest housing stocks the analysts initiated coverage on received a neutral rating, while one was initiated with a buy rating.

Upsides To Homebuilder Stocks

Goldman Sachs analysts Eli Hackel and Devi Biswal gave some general guidelines for their view of housing stocks. They gave a buy rating to those with exposure to housing markets which have the best growth potential. They also focused on the higher end because they see wealth creation and mortgage credit access increasing.

They gave a sell rating to companies which cater to the low end of the housing market and / or focus their efforts in geographic areas where the housing market is not growing as quickly as it is in others. The analysts saw a 24 percent upside to the stocks they rated as buys and a 3 percent downside to those they rated as sell.

Toll Brothers, Ryland, Meritage Receive Buy Ratings

They initiated coverage on Toll Brothers Inc (NYSE:TOL) with a buy rating, making it one of their top picks in terms of homebuilder stocks. Their other two top picks were The Ryland Group, Inc. (NYSE:RYL) and Meritage Homes Corp (NYSE:MTH).

Toll Brothers Inc (NYSE:TOL) addresses the Washington, D.C., New York and Philadelphia markets, while Meritage Homes Corp (NYSE:MTH) addresses the Dallas, Phoenix and Orlando areas. The Ryland Group, Inc. (NYSE:RYL) focuses on Indianapolis, Charlotte and San Antonio. They believe Charlotte, Jacksonville and Orlando are the best housing markets in the nation right now.

Housing Stocks With Neural Ratings

NVR, Inc. (NYSE:NVR), KB Home (NYSE:KBH), D.R. Horton, Inc. (NYSE:DHI) and Beazer Homes USA, Inc. (NYSE:BZH) all received neutral ratings from analysts at Goldman Sachs. They said NVR, Inc (NYSE:NVR) addresses the New York to Washington, D.C. corridor, which are lower growth markets, although they do have defined capital allocation.

KB Home (NYSE:KBH) focuses its efforts on California and Texas, which the analysts say are both good markets, although they are on the lower end. D.R. Horton, Inc. (NYSE:DHI) has business in Texas, Phoenix and Seattle, which are also solid markets, but once again, they are on the low end.

Beazer Homes USA, Inc. (NYSE:BZH) has its business in Indianapolis, Washington, D.C. and Phoenix. They said there are signs of a turnaround in progress but that uncertainty remains.