FBR: 2014 good for housing, not so much for economic growth
CFPB, QE3 will drive markets
The coming year will see the continued slow-but-steady recovery in housing and housing-related industries, minimal interest rate movements, less than stellar economic growth, and an improving purchase market.
That’s the prediction from the brain trust at FBR & Co. FBR is a leading investment bank that focuses its efforts across a broad array of industries including financial institutions and real estate, among a host of others.
Despite the overall tepid outlook, the FBR forecast does point to good signs for the origination market.
"Financials, particularly banks and thrifts, outperformed the broader indices in 2013, and, generally speaking, we expect in-line performance at best over the coming year as stock prices have drastically outperformed fundamentals for most spread-based lending businesses," the FBR 2014 forecast states.
In particular, the mixed overall news looks good for housing.
"We expect that those subsectors most levered to a continued recovery in housing will outperform in 2014, as housing-levered industries should have the largest opportunities for growth in the near term," the report states.
The FBR report covers a lot of ground.
FBR says that 2014 will be the year of the regulator.
"A rules change in the Senate allowing for greater control over confirming regulators and judges is likely the beginning of a more aggressive regulatory stance," FBR says. “It is clear that many in Washington want to expand mortgage credit availability, and the debate will focus on their success. The Consumer Financial Protection Bureau (CFPB) remains a significant source of focus and has recently added overdraft fees and payday loans to its 2014 regulatory agenda.”
As for housing, there are many silver linings for homebuilders, mortgage insurers and single-family REITs.
"We believe that 2014 will be a strong year for housing-related names, as we continue along the road to a more normal market. Homebuilders should continue to benefit from increased volumes and scale, while mortgage insurers will capitalize on a growing purchase market and a need for capital within the space," FBR predicts. "Single-family REITs should continue to acquire, renovate, and lease homes this year, with the potential for consolidation happening later in the year as larger players use their cost of capital to their advantage."
Other predictions for 2014 include:
We head into the new year expecting investors to favor quality names in the bank space, as increasing rates and improving sentiment caused bank stock performance to drastically outpace improving fundamentals in 2013. As such, we believe banks that do not earn their cost of capital will lag in the near term as investors re-evaluate the sector with an eye toward profits and growth as "getting better" is likely to be less in vogue.
We expect U.S. credit card receivables to grow at a modest 3% to 4% in 2014, due to low growth in discretionary spending, elevated payment rates, and continued constrained access to credit for certain borrower segments. Discretionary spending and its drivers should be leading indicators for any potential change in growth trajectory of U.S. credit card receivables.
While the industry as a whole continues to face fundamental headwinds, including slowing consumer demand and gold price headwinds, our overarching belief is that those companies that have simple business models, above-average growth prospects, low regulatory risk, and attractive valuations will outperform. After two consecutive years of EPS growth deceleration for the group overall, 2014 should show a reversal in the trend, and we expect investors will continue to pay up for higher quality franchises.
- We are focused on owning those sectors/names that can control their own destiny (with favorable macro fundamentals), rather than living or dying based upon the “yield curve du jour.” In particular, we highlight the CRE/structured finance REITs as the line of site toward earnings/dividend growth is clearer than residential mREITs, and there is substantially less risk around QE3 taper.