More First-Time Buyers Boost Homebuilders

 | Jan 19, 2017 | 2:59 PM EST
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

dhi

Recent volatility in monthly housing starts data, including December, merely functions to revert starts to trend -- and the underlying trend remains up. The trend rises now mostly for single-family construction and is generally weakening for multi-family. This is not an altogether odd mix considering the rent/buy calculation favors buy when, at last, millennials entering prime home-buying age just when the expansion has raised employment levels and income enough to support eligibility for mortgage credit.

The upshot is a strong year for single-family home construction, most notably for homes to be sold to first-time buyers. A number of builders of new homes, such as DR Horton (DHI) , have shifted market strategy in the past several years towards first-time buyers and away from move-up purchasers, which was the support of housing during the early years of the recovery.

That's a move, I would argue, that still has a fair amount of tailwind to it, and this should increase in the coming year. A number of analysts believe higher mortgage rates may quash demand, but this ignores the why of rising rates. If, as I have written before, rates are rising because of improved growth, real and expected, and this is carrying the equity market higher as well, there is more reason to believe home buying accelerates.

Historical analysis bears this out, and the chart below illustrates how far below the median the housing economy is running -- in terms of units started and residential fixed-investment as a share of real GDP. There is absolutely no reason to expect a repeat of 2004-05 given how sanity has returned to mortgage underwriting standards. There is, however, reason enough to expect single-family starts to continue to trend higher to a 1.06 million-unit SAAR run rate with real residential fixed-investment returning to 4.5% of real GDP.

The chart below illustrates the continued upward momentum for single-family starts along with the rising employment/population ratio for 25-year-olds to 34-year-olds. As long as the economy continues to expand, which is expected, this ratio, still below its pre-recession high, has more upside left to it.

Looking at the recent survey of homebuilders, they are in sync with a positive outlook and the level suggests steady to a somewhat higher pace of single-family starts in the months ahead.

 

Lastly, staying with builder sentiment for the moment, they have an excellent track record of forecasting the unemployment rate 24 months out -- certainly better than anyone else in the current recovery. Based on the current readings, a slow drop in the unemployment rate towards 4% is in the offing as far as builders are concerned, and I have learned my lesson to listen to them first.

Columnist Conversations

SPX weekly View Chart »  View in New Window » $SPX Daily

BEST IDEAS

REAL MONEY'S BEST IDEAS

News Breaks

Powered by

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.