Homebuilding activity is coming back to life.
On Monday, as the spring selling season kicks in, RBC Capital Markets upgraded its forecasts for housing starts through 2017.
In a note to clients, RBC’s Robert Wetenhall wrote:
“We are raising our forecast for housing starts in 2015, 2016 and 2017 to 1.1 MM (+10%), 1.2 MM (+9%) and 1.25 MM (+4%) … This is an obvious positive for the spring selling season and leads us to believe that our preferred names (DR Horton, Lennar Corporation, and PulteGroup) among the public builders can potentially meet or beat consensus estimates driven by strong demand and solid ASP growth.”
Wetenhall highlighted four reasons why housing starts are set to accelerate faster than they had previously forecast:
- A stronger labour market with higher employment levels among 25 to 34-year-olds in higher paying industries supports first-time home buying.
- Easing credit standards and low mortgage rates (due to low interest rates) make it easier to get home financing. In the fourth quarter, the Federal Reserve said 13.9% of banks had eased lending standards, versus 2.8% that had tightened.
- Rental vacancy rates fell 7% in the fourth quarter, the lowest level since 1993. Even though rental rates are through the roof, low monthly mortgage payments make home ownership that much more attractive.
- The pace of household formation is accelerating. Payroll data shows residential construction jobs are on the rise. In the 12 months following February 2014, residential construction jobs rose 107,000 — the fourth largest increase since 2006.
And this upgrade from RBC comes on the heels of a big deal in the homebuilder space, as Builders FirstSource announced a deal on Monday to acquire ProBuild holdings for $US1.6 billion. Shares of Builders FirstSource rose more than 60% following the news.
Here’s the historical pace of housing starts and RBC’s forecasts for the next three years.
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