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Our Top Housing-Related Pick

Robust third-quarter housing data has stretched most valuations.

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Compelling third-quarter data allowed a collective sigh of relief among investors holding housing-related stocks. Earlier in 2019, disappointing construction data fueled speculation that home construction had peaked, but building is back. Demand is robust, mortgage rates and rents are down, and builders are eager to work. These improving fundamentals have sent valuations of related coverage sky-high.

We still expect builders to break ground on 1.3 million new homes in 2020 before gradually climbing toward our midcycle estimate of 1.4 million homes annually. That leaves us above consensus over the next few years, and yet, from homebuilders to apartment real estate investment trusts, every related industry looks overvalued at current prices. Investors are right to believe that management execution matters, but they may underestimate how relevant the housing environment is to business fundamentals.

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Charles Gross does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.