In one of the most read reports out today, Goldman Sachs is
optimistic on the housing market and expects continued growth based
on evidence that the recovery is not structurally flawed.
As a backdrop, the real estate market has been heavily debated
by both the sell-side and the buy-side among the street, hedge
funds, and mutual funds as student debt levels have continued to
increase (thus negatively impacting potential first time
As an aside, it is worth noting that the introduction of
for-profit education has perpetuated this trend as more students
have decided to attend online colleges based on the ease of
This includes companies such as Apollo Group (
), Devry (
), ITT International (
), Corinthian Colleges (
), and Career Education (
Notably, this was also a large short among alternative investors
given the demographics of the underlying colleges, the lack of
credibility, and number of defaults from government backed student
loans. Moreover, the majority of the companies in the for-profit
sector used aggressive accounting measures to book revenues.
Moving back to housing, the bear case revolves around the the
premise that younger buyers are less affluent as a result of these
higher debt burdens. Investors are also wary of the rise in
mortgage rates and already high home prices.
That being said, Goldman finds that student loans do not depress
expenditures for new homes. This is supported by recent indicators,
which convey that credit is still easing.
In fact, a lower home ownership rate in the 25-44 year old
segment should actually spur housing demand, as most of the
shortfall in home ownership comes from medium to high-income
Countering the argument that lower incomes are stalling the
recovery, the analyst notes that this is an over-simplification and
ignores the impact from mix given that simple median household
income tends to understate income growth.
It is no secret that the housing bust and the ensuing financial
crisis led the economy into one of the worst recessions since the
Great Depression. That being said, the analyst believes that the
decline is cyclical and thus, by definition should reverse going
forward. GS sees signs of a recovery in the private sector, and the
most recent data released by the Census Bureau conveys that
household income has stabilized in 2012.
As an aside, annual household income is obviously important, but
it is not the only data point used to assess housing affordability
and demand. Investors should not extrapolate income growth using
the straight-method, as the correlation is not one-to-one.
Moreover, Goldman finds evidence that new homes are still
affordable, especially versus historical levels. 30 year mortgage
rates are at multi - decade lows.
This was reiterated last week at the Bloomberg Markets 50
Summit, which MT Newswires attended. Panelist members included
Richard LeFrak, President of LeFrak Organization and Steven
Witkoff, Chairman of Witkoff Group.
For example, 30-year mortgage interest rates averaged 13% in the
1980s, 8% in the 1990s, and 6% since 2000, per the report. Thus,
even if median household income stays the same, mortgage interest
rates are significantly lower when compared to decades prior. This
implies that the median borrower can afford a more expensive house
Bottom line, the analyst recommends builders in strong housing
markets, especially those that cater to the higher end including
Ryland Group (RYL), Meritage Homes Group (MTH), and Toll Brothers
From a buyer's perspective, Douglas Yearley, CEO of Toll
Brothers (TOL) also spoke last week at the Bloomberg Markets 50
Summit, noting that "rates are back down to 4.25%."
XHB 30.56 +0.06 +0.20
APOL 20.81 0.00 0.00
DV 30.56 0.00 0.00
ESI 31.00 0.00 0.00
COCO 2.19 -0.01 -0.45
CECO 2.76 +0.01 +0.36
RYL 5.62 +0.08 +0.20
MTH 42.95 0.00 0.00
TOL 32.43 0.00 0.00
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