The 2014 housing market is looking up for homebuilders with less competitive inventory sitting on the sidelines, escalating prices and increased housing demand, says Sterne Agee analyst Jay McCanless. 

In light of those views, McCanless gave builders D.R. Horton (DHI), MDC Holdings (MDC), Meritage Homes Corp. (MTH), Ryan homes (NVR), PulteGroup (PHM) and Ryland (RYL) ‘buy ratings.’

McCanless notes that a seller’s market exists in the top 25 U.S. markets, and he currently views these builders as 'undervalued.' He is also predicting lenders will open up more credit to potential homebuyers in 2014, giving another boost to homebuilders.

For starters, consumer confidence is on the rise, McCanless points out that the University of Michigan Consumer Sentiment Index improved 190 basis points from October’s reading and a survey of leading economic indicators rose month-over-month for the fifth month in a row.

Median year-over-year price growth in the top 25 housing markets averaged 13.5% versus 9.9% growth for national existing home sales.

"We monitor existing home price trends because we believe builder pricing power is currently a function of scarcity and local market price growth. Average year-over-year unit sales in November declined 3.8% for the Top 25 markets versus a 3.6% year-over-year unit decline for the national market," said McCanless.

The time homes are staying on the market also is falling with the November 'months to sell' rate hitting 4.1 months, much lower than the 5.1-month average a year earlier.