A Favorable Forecast for the Housing Market

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.

Looking to 2020, we have maintained our forecast of 1.3 million starts, gradually climbing thereafter toward our midcycle pace of 1.4 million units. Unfortunately, the rebound in housing activity has inflated valuations in the industries we cover. We think the market has overreacted to the sharp swing in housing market conditions, leaving every industry overvalued on average.