Canada's Bank of Nova Scotia (NYSE:BNS) put out its 2013 market forecast at the beginning of December. Its analysts see the S&P 500 rising 10% in the coming year, double what Canadian investors should expect. The big reason for the outperformance south of the border according to the bank: "Attractive affordability and low inventories point to a sustained recovery in U.S. housing activity in 2013, a development that could solidify 'Main Street' confidence. A pick-up in housing data (starts, sales, prices) could represent the biggest threat to the bond bull market. Homebuilders and lumber companies should perform well."
While it's not a massive sample of analyst sentiment, I think you'll find most of the professional opinion says pretty much the same thing. The housing recovery is real and gaining momentum. Forget the crystal ball. Here is my list of things that could definitely happen to the Home Builders sector in 2013.
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Up, up and Away
Barron's published an article June 11, 2012, almost halfway through the year, recommending investors get out of homebuilder stocks because the charts were showing a declining trend. As of June 11, the SPDR S&P Homebuilders ETF (ARCA:XHB) was up almost 15%. Who could blame the technical analysts for thinking a reversal was in order? Funny thing about technical signals, they're often wrong. Over the next six months the XHB gained another 30% through December 14. Investors who followed the advice of Barron's have approximately $3,549 less in their portfolio based on a $10,000 investment at the end of 2011. As we move into 2013, will Barron's have the nerve to double down and recommend investors once more take their money off the table. Not if they're smart they won't. This is a housing recovery that's likely to take several years to truly run its course.
As we begin another year it's nice to know that homebuilder confidence is at a six-year high. The National Association of Homebuilders chairman Barry Rosenberg says, "Builders are reporting increased demand for new homes as inventories of foreclosed and distressed properties begin to shrink in markets across the country. Many potential buyers who were on the fence are now motivated to move forward with the purchase in order to take advantage of today's favorable prices and interest rates." One area investors might focus their attention in 2013 is in the Midwest where homebuilder confidence is strongest. Of all the large homebuilders, Pulte Group (NYSE:PHM) is your best bet as it does business in many of the Midwestern states.
SEE: Will Homebuilders Continue To Outperform?
The Demand Institute is a non-profit operated by the Conference Board in association with A.C. Nielsen. It produced a very interesting report in May 2012 about the housing recovery and what it would look like. The first point is that home prices will increase approximately 2.5% in 2013 and 2014 followed by increases of 3 to 3.5% in 2015 through 2017. Secondly, a big part of the recovery will be increased demand from buyers of rental properties. In previous housing recoveries, the primary demand came from buyers of homes for themselves. Therefore, in addition to investing in homebuilders, a big way to benefit from the recovery in 2013 is to own the individual stocks of multi-family real estate investment trusts (REITs) or exchange traded funds (ETFs) that own multi-family REITs. The iShares Residential REIT Capped ETF (ARCA:REZ) owns 34 stocks including Equity Residential (NYSE:EQR), the residential REIT headed by Chicago billionaire Sam Zell. One of 15 apartment REITs in the ETF, I'd be inclined to own the ETF in this instance. Whatever you decide to do, 2013 looks very promising.
According to the Demand Institute, the average size of a new home in 1980 was 1,700 square feet. By 2007, before the housing crisis kicked in, the average size ballooned to 2,500 square feet. Fortunately, saner heads appear to have prevailed as the average is slowly dropping. By 2015 it's expected to be 2,150 square feet, about the same size of the average new home in 1995. Many of those buying smaller homes are people over the age of 50 who want less space and fewer hassles. Builders that cater to this market will also do well in 2013.
SEE: How To Analyze Real Estate Investment Trusts (REITs)
The Bottom Line
The real fly in the ointment for the housing industry is what a solution to the fiscal cliff will mean for people's pocketbooks. All bets are off for housing until a solution is announced. After that it's full speed ahead. The year ahead looks good for homebuilders.
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.