BofA On The U.S. Housing Market: 'Feelin' Alright'
On February 9, Bank of America released a note titled "Housing Watch: Feelin' alright," which covered a recap of the economic metrics that fuel housing demand and drive performance of publicly-traded homebuilders.
Tale Of The Tape - 2015 YTD
Here is a quick look at publicly traded homebuilders: PulteGroup, Inc. (NYSE: PHM), Lennar Corporation (NYSE: LEN), KB Home (NYSE: KBH), Toll Brothers Inc (NYSE: TOL) and D.R. Horton, Inc. (NYSE: DHI).
Lennar shareholders have seen the best performance 2015 year to date, just over double the return of the SPDR S&P 500 Homebuilders (NYSEARCA: XHB).
B Of A - Key Takeaways
Housing Starts: forecast 1.175 million this year, up from 1.004 million in 2014.
Home Prices: appreciation has slowed, a trend B of A believes will continue, (with some upside potential). B of A forecasts national home prices to increase 3.7 percent this year, nearly matching the growth in disposable income per capita.
Household Formation: accelerated at the end of 2014, offsetting the weak start to the year. This should be a tailwind for homebuilders in 2015.
B of A estimated that 800,000 households were created last year, still below the historical pace but above the recent trend.
There is additional pent-up household formation which should be realized in the coming years, underpinning housing construction.
Overall Homeownership: The homeownership rate tumbled to 63.9 percent in 4Q14, back to the levels last reached in the early 1990s. Part of the downshift in the homeownership rate at the end of last year reflects the tendency for new households to rent.
The homeownership rate threatens to reach a new record low in coming years.
Price Of Oil & Housing Demand
Back on January 9, B of A addressed how the plunge in oil prices might play out for housing demand in a note "Save The Alamo."
Texas & North Dakota: notably make up about 15 percent of U.S. housing demand.
Home price appreciation in the oil states will also be negatively impacted. Slower job growth means less income creation, hurting affordability and therefore weighing on home sales.
U.S. Overall: While the housing market in oil-producing states will weaken from the drop in energy prices, analysts think this will be offset by positive developments otherwise.
The decline in oil prices has been accompanied by a drop in mortgage rates, boosting affordability. On a national scale, the stimulus from lower oil prices and interest rates is a powerful offset to the pain caused from the plunge in oil prices in certain regional markets.
Real Estate Big Picture
The broader SPDR S&P 500 (NYSEARCA: SPY) outperformed the homebuilders as a group during the past year.
Commercial real estate, represented by the Vanguard REIT Index ETF (NYSE: VNQ), has been the top performer by far for investors; driven in part by the current low interest rate environment.
Image credit: Senseiich, Wikimedia
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