Barclays bullish on housing
Analysts at Barclays Capital conclude that the housing market is no longer a drag on the economy.
“Based on recent macroeconomic data, paired with the latest round of homebuilder results, we are more bullish on housing and the fundamentals of the homebuilders,” they say in a Friday research note.
Still, the Barclays report comes out on the heels of disappointing April jobs numbers with only 115,000 jobs added for the month. The news sent the S&P and NASDAQ on pace for their lowest numbers since mid-December. About 2,500 residential construction jobs were lost in April, taking the sector's total to down to 565,600.
Analysts at Barclays cite the strength of the nation’s rental market in its bullish take on housing. At 209,000 units, multifamily starts doubled over the past two years, and permit activity continues to trend higher, suggesting that the upward trend in multifamily starts remains in place.
Single-family starts, which in the first quarter finished below expectations, tell a different story. “Two things need to happen for us to turn more constructive on single-family start activity,” Barclays says. “First, an ongoing, albeit moderate, recovery in the U.S. has to translate into firmer housing demand, and second, new home inventory levels have to get even leaner."
Perhaps the housing industry is not far from meeting those two conditions.
Net revisions in March added 56,000 to new single-family home sales, a significant bump when viewed against the current base rate of sales of 328,000. This pushed new home inventories to an all-time low of 144,000 units, or 5.3 months of sales. Months’ supply averaged about 4.5 months prior to the downturn.
Fitch Ratings predicts single-family housing starts will increase 10% in 2012, while new home sales will rise 8%. Still, the ratings giant sees an erratic homebuilding market after witnessing disappointing results for 2011.
The firm expects builders to fare better in 2012 with the market peppered with less competitive rent options and new home inventories at historic lows.
And homebuilders are finding these trends reassuring. They experienced a 22% order growth in the first quarter and are riding a tailwind heading into the second, causing Barclays to see the first signs of price increases coming back to the market.
“Not everywhere, but in enough places to matter,” they say.
Stephen Kim, managing director of Barclays’ homebuilding division, said Phoenix, Denver, Orange County, Calif., Westchester County, N.Y., and even parts of the hard-hit Riverside-San Bernardino, Calif., region is witnessing price comebacks.
Paul Diggle, property economist at Capital Economics, tells HousingWire that “housing is either already, or very soon to be, a boost to economic growth.”
However, following the crash, housing makes up a smaller share of the economy than it did in the past, causing any boost to the wider economy from growth in the housing sector to be smaller.
In the fourth quarter of 2011, residential investment accounted for just 2.5% of overall gross domestic product, Diggle notes, down from the 2005 peak of 6.3% and the 1946 to 2008 average of 4.8%. Back in 2005, every 10% increase in residential investment boosted GDP by 0.6 percentage points. The same increase would now boost GDP by just 0.2 percentage points.
“Put another way, housing now has to work harder to boost GDP growth,” Diggle says.
Residential construction contributed positively to GDP growth for four consecutive quarters, a trend analysts expect to continue throughout our forecast horizon.
“The low base from which housing is starting means that the sector is not likely to contribute significantly to growth as it has in many previous recovery phases, but the fact that housing has stopped falling is a point worth making,” Barclays says.