According to data from the National Association of Home
Builders, each home built creates an average of three jobs for a
year and generates about $90,000 in tax revenue. The Department
of Commerce says expenditure on home construction and home
improvement has contributed to economic growth for six straight
But given rising prices and interest rates and lot and labor
shortages, will the sector recovery's momentum remain
Three crucial reports on the sector have just been released
and each of them indicates that the housing market has improved
significantly. The National Association of Home Builders ('NAHB')
released data on the NAHB/Wells Fargo Housing Market Index which
increased marginally to 47 in December, its highest level since
April 2006. Even so, it remains below the key figure of 50 and
only a rating above this mark means more builders view sales
conditions as poor than good.
Next up was Housing Starts, which came in slightly lower than
expected at 861,000, an effect ascribed to Hurricane Sandy. This
is far higher than the recession low of 478,000 recorded in April
2009. However, it remains well below the annual rate of 1.5
million, the sign of a healthy market.
Lastly, Existing Home Sales which increased sharply, by 5.9%,
to 5.04 million units in November, the highest level in three
years. Meanwhile, prices have risen 5.6% from last year since the
current supply of homes will last only 4.8 months, the lowest
level in seven years. Distressed home sales have also fallen by
2%, further pushing up prices.
The picture looks quite rosy at this point, but there are
roadblocks that the housing sector could face in the year ahead.
The US Economic and Housing Market Outlook for December released
by the Federal Home Loan Mortgage Corp (FMCC), or Freddie Mac,
claims the market will pick up further in 2013.
Household formation is projected to increase by 1.2 to 1.25
million with housing start-ups only at 1 million by Q4 2013. As
household formation exceeds construction, vacancy rates will fall
below 2002-03 levels.
Further, long-term mortgage rates will also start rising by
the second half of 2013, increasing property value. The major
contention of the report is that consumers will take advantage of
lower prices. But we are already seeing how rising prices are
giving more power to sellers. But this could deter buyers, since
lower prices were what were bringing them back in the first
Another factor which could affect home affordability is the
increase in "guarantee fees" which are fees charged to lenders by
Fannie Mae and Freddie Mac. These charges have risen sharply over
the last month and have now touched a high of 46 basis
These fees are eventually borne by borrowers in the form of
higher interest rates. Probably this is why the Freddie Mac
report predicts rates to rise by the second half of 2013.
Meanwhile, there has been very little land development since
the housing crisis. According to the NAHB's Chief Economist David
Crowe, developers faced with a strong increase in home sales are
faced with lot shortages.
Further, a recent survey by John Burn's Real Estate
Consulting, nine out of ten builders across the country reported
a rise in lot prices. Two years ago, only one out of ten had
reported an increase. In October,
) said they had raised spending on land purchases from $90
million to $1 billion in 2012.
Shortages in labor could be and even bigger problem according
the NAHB's Chief Economist. A large number of workers had quit
the industry during difficult times and joined other sector.
Migrant labor had gone back to Mexico. Home constructions jobs
have fallen by over 1.4 million since 2008.
An analyst at consulting firm MKM Partners said labor and lot
shortages taken together could result in single family home
building increasing only 23%, as against the 35% predicted by the
Thus, the recovery will continue but probably at the same pace
as it has done this year. This is why it would be prudent to hold
a portfolio with the stocks from both the housing industry and
One such pick is
MDC Holdings, Inc.
). The company is ranked among the top homebuilders by all three
rating agencies, with two investment grade ratings. It has a low
exposure to land inventory but at the same time its proportion of
finished lots is higher.
Further, it is one of only two builders with more cash than
debt, which means it has the ability to support future land
acquisitions. Moreover, the company has paid regular dividends
since 1994. The company currently holds a short-term Zacks #1
Rank (Strong Buy).
PulteGroup is one of the largest homebuilders in the U.S., and
its shift towards higher-priced homes for customers wanting to
upgrade indicates that overall average selling prices will rise.
Its liquidity position is better than its peers and as mentioned
earlier it will invest $1 billion for 2012, which would probably
stave off shortage issues.
Meanwhile, the company orders for the company have grown
consistently by double digits for two consecutive quarters,
despite the fact that orders have come from a declining number of
communities. The company currently holds a short-term Zacks #2
Coming to related sectors,
The Home Depot
) could be a good choice. The housing recovery is still underway
which means people will continue to improve their homes and sales
for Home Depot will increase. Areas affected by Hurricane Sandy
could also push up demand, driving up sales further. The company
currently holds a short-term Zacks #2 Rank (Buy).
As housing starts increase further, sales will increase for
the paint segment which means
) stands to benefit. Besides, the company sells premium quality
paint at higher prices compared to its competitors which includes
the likes of Benjamin Moore, BASF and
DuPont Fabros Technology, Inc.
Further, according to an analyst at
), prices of Titanium Dioxide, a key ingredient of Sherwin
William's paint, fell by 5% in the third quarter. Prices of
Titanium Dioxide will probably fall by the same amount in the
fourth quarter. The company currently holds a short-term Zacks #2
DUPONT FABROS (DFT): Free Stock Analysis
HOME DEPOT (HD): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis
MDC HLDGS (MDC): Free Stock Analysis Report
PULTE GROUP ONC (PHM): Free Stock Analysis
SHERWIN WILLIAM (SHW): Free Stock Analysis
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