Top Stock Picks for Housing Growth
Although the housing market has several factors still working against it, these undervalued names are poised to benefit from supportive demographics.
Top Stock Picks for Housing Growth
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James Krapfel: Some of the recent housing data has been very mixed in our opinion. We saw a lot of weather-related weakness over the last few months. There will be some improvement more going forward post-weather, but still housing starts are well below normalized levels.
We believe there are a number of reasons that are at play here. One is that, mortgage availability is still quite tight when you look at the historical context. Second, housing affordability is still quite challenged. Home prices are up in the double digits, whereas mortgage rates are up still from year-ago levels and overall household income is still pretty stagnant. And then also the supply of homes both in existing- and the new-home side is very challenged, still. So that's really keeping volumes from recovering to closer to midcycle levels.
Going forward for the housing market, there are a number of positives and negatives. On the positive side, we believe that the demographics of the country actually are supportive for housing. Baby boomers and echo boomers reach 68 and 29 years old this year, respectively, at least on the leading edge of that. And we think that's supportive for housing. Also the new FHFA director seems to be much more pro-housing. He has announced some things that are positive for housing already.
On the negative side, we think that population growth has definitely slowed this year versus decades in the past and so that's going to be not supportive for overall household formation. Also there is an overall trend toward people wanting to rent versus own. We think that will continue somewhat going forward as well as people living more in urban environments versus the suburbs. That has some ramifications for the homebuilders and the supplier companies that we cover.
As far as our top picks, NVR, a homebuilder based in Virginia, is our best pick. It has about an 18% discount to our fair value estimate. Also, Fortune Brands Home & Security, which provides products into the home, like Moen plumbing products, that is also somewhat undervalued at about 11% discount to our fair value estimate.