Moving Up: Can the Housing Market’s Sales Surge Be Sustained?

While the housing market was not particularly robust in the first quarter of 2016, things seem to be looking up for the rest of the year. Traditionally, spring is a good time for the market. Then again, the sales surge it is experiencing can hardly be attributed to the invigorating effects of the season alone.

First Quarter Jitters

In the Reuters report, “New U.S. home sales drop on sharp decline in the West,” Lucia Mutikani observed: “New U.S. single-family home sales unexpectedly fell in March, but the decline was concentrated in the West region, suggesting that the housing market continued to steadily improve.”

The report had quoted Daniel Silver, an economist at JPMorgan Chase & Co in New York, as saying, “Through some of the short-lived ups and downs in the data, it still appears that new home sales are trending higher over time.”

Silver was referring to the fact that “new home sales are volatile month-to-month because they are drawn from a small sample.” Thus, as the report indicated, the sales decline in the first three months of the year “does not signal a slowdown in the housing market.”

Sales Boost

That said, another Reuters report by Mutikani, “U.S. home sales rebound signals strong spring selling season,” later confirmed, “U.S. home resales rebounded more than expected in March as supply improved, suggesting the housing market recovery remained intact despite signs that economic growth probably stalled in the first quarter.”

The National Association of Realtors likewise revealed that “home sales surged 5.1 percent to an annual rate of 5.33 million units (in March), beating economists' expectations for a 3.5 percent increase. Sales were up 1.5 percent from a year ago.”

The sales boost that the market experienced at the onset of the spring selling season is interpreted as “a sign of confidence in the economy.” Industry forecasters are optimistic that the trend would be sustained with a firming labor market, low mortgage rates, and stock market gains.

Housing Projections

The Street‘s Than Merrill outlined the trends that would define the housing market in the next few months — and possibly until the end of the year. Merrill observed the following:

1. More buyers may opt for brand new new homes. With a limited number of existing homes up for sale — be they starter home or fixer-uppers — more and more buyers will consider buying brand new homes. Ralph McLaughlin — a chief economist at residential real estate site Trulia —  explained, “Low existing inventory likely pushes prospective buyers away from existing homes toward new homes, and as new home sales rise, this allows builders to sell more new homes off of a plan.”

Svenja Gudell, the chief economist for the housing site Zillow.com, added, “As affordable housing close to city centers grows increasingly scarce, people will move farther out. Dense, walkable suburbs with an urban feel – especially those that offer good access to the city – will be 2016's new hot spots.”

2. The seller has the upper hand. There are a limited number of homes for sale, so sellers have the leverage to name their price. This is especially true for “starter homes.” First-time buyers have to act fast if they want a property.

3. There will be more buyers than renters. Citing a recent Freddie Mac survey, Merrill noted that “seven in 10 respondents believe it’s cheaper to pay rent than a monthly mortgage on a home.” Perhaps, this is an indication that people are now thinking of long-term options when it comes to choosing where to live. Being a long-term renter would, arguably, mean that you're shelling out money for something you would never own.

Gudell also weighed in on this trend, saying, “As renters gradually transition into homeowners, the historically low homeownership rate should stop falling quite as quickly as it has been. However, the median age of first-time homebuyers – already the highest it has ever been at about 33 – will climb higher. Millennials want to buy, but they are waiting longer than previous generations. “

Areas of Concern

Amid the optimism for the housing sector, Steven Russolillo, a markets reporter for the Wall Street Journal, has raised some issues that need a closer look.

To begin with, Russolillo pointed out that “the housing market’s foundation may remain solid, but it is lacking the flair to propel home-builder stocks much higher.”

Then again, the lack of flair isn't so much of a problem as the fact that “the number of existing homes is near its lowest in over a decade.”

Megan McGrath an analyst of MKM Partners, a research firm providing equity and economic research, explained that home builders “aren't profiting as much in the entry-level market for homes priced at $200,000 and below.”
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In the long run, this may have a significant impact on sales, as this segment of the market is considered a “growth driver.” Naturally, if it is no longer there, the market will bear the effects of its absence.

Stock Picks

Taking into consideration the current market trends, analyst Swarup Gupta said, “The steady pace of growth in the housing sector means that it is an increasingly attractive investment option.”

Gupta then asserted that it was “important to pick winning stocks from this sector.” That said, below are the companies whose stocks he recommends:

1. Gibraltar Industries, Inc. manufactures and distributes a range of products — from ventilation components and expanded metal to mail storage solutions and rain dispersion products and solutions — to the industrial and buildings market.

2. Hovnanian Enterprises Inc. is one of the largest home-building companies in the U.S.

3. KB Home is a well-known U.S. home-builder and one of the largest in the state of California.

4. Watsco Inc. is the largest distributor of heating, ventilation, and air conditioning equipment.

5. Universal Forest Products Inc. produces lumber, composite wood, plastic, and other building materials.