Housing has shifted from a major drag to a small positive factor for the U.S. recovery. There remains upside potential for some of the assets related to U.S. housing.
Y ear-to-date total returns for housing-related assets have been impressive. Homebuilder stocks, REITs and bank stocks all beat the S&P 500 by a wide margin so far this year. Even in the fixed income space, several assets rivaled the S&P 500 in total return, while high-yield home construction bonds rewarded investors with a whopping 20% gain.
Assuming a 5% rise in home prices, a 20% increase in new home sales and a 5% rise in total housing starts to 800,000 by year end, our U.S. Investment Strategy service estimates housing-related assets should continue to outperform in the second half of this year. Importantly, all of the fixed-income housing-related assets are still cheap despite excellent returns already generated so far this year. As a result, valuation should not be a reason to exit any of these investments, unless housing activity takes a turn for the worse, which is not our base case.
Homebuilders are expensive by traditional valuation metrics, but measures such as price/book and price/cash flow are distorted by the extreme weakness in book value, cash flow and sales in recent years. There is plenty of upside for these equities if housing starts continue to move higher. Thus, value is arguably better than the standard valuation ratios currently suggest.
Bottom line: Exposure to housing-related fixed-income securities and homebuilder stocks is still warranted.