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A Favorable Forecast for the Housing Market

However, the rebound in housing activity has inflated valuations.

Charles Gross: During the first half of this year, housing conditions were looking drab. Building activity contracted sharply, about 4.5%, as market participants started to get concerned about the trajectory of the global economy. However, everything got back on track during the second half, with starts up nearly 7% through November.

We think conditions remain favorable, which should sustain homebuilding activity. First, homebuilders are optimistic. The public homebuilders are experiencing solid new-order growth and have access to the land they need. Second, winter tends to free up labor to enable "catch-up" construction when resources are constrained as they are now. And third, financial conditions are decent. Falling interest rates has again made home ownership more attractive, while rents on vacant units have finally stopped climbing. These factors should allow more household formation.