How Homebuilding Can Be Constructive To Your Portfolio

First-quarter 2017 showed dismal economic growth. Nevertheless, housing got off to a good start this year attributable to low interest rates (trending down since March). This, along with solid job growth, has bolstered housing demand.

Last year was reasonably good for the housing market and the trend is expected to continue this year, courtesy of a healthy demand-supply balance, historically low mortgage rates, escalating rent costs and easy availability of loans. Again, there are signs of increased inclination of home purchases among millennials, a generation that had to some extent refrained some from entering the market.

For that matter, there are plenty of reasons to be optimistic about the broader housing sector for both the short and the long term.

Below we discuss some of the key factors driving the sector and what investors can expect going ahead.

Higher Demand, Low Inventory Boost Sales

Steady economic growth along with favorable demographics, historically low interest rates and the attractiveness of owning versus rent are driving demand. Although GDP growth in the first quarter of 2017 was slower than the preceding quarter, residential investment contributed 0.5% to GDP growth. Residential investment saw 13.8% annualized growth.

Per the National Association of Realtors or NAR, total existing home sales, which include both single-family and condos, rose 1.4% sequentially to a seasonally adjusted rate of 5.62 million in the first quarter, marking the highest growth in a decade. Also, total existing home sales increased 5% year over year.

For 2017, existing home sales are projected to increase 3.5% from 2016 levels, while new single-family home sales will increase 10.9% nationally, as per the National Association of Realtors’ Jun 2017 forecast.

On the other hand, a shortage in buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes, both new and existing. The convergence of healthy demand and low inventory levels is boosting new home sales and is expected to continue doing so for some time.

At the end of the first quarter, there were 1.83 million existing homes available for sale, which was down 6.6% year over year, as per data released by the NAR. The average supply during the first quarter was 3.7 months, showing a decrease from 4.2 months in the first quarter of last year.

Even at the end of April, the total housing inventory level had 1.93 million existing homes available for sale. The reported figure was 9% lower year over year and has fallen for 23 consecutive months.

Healthy Demand-Supply Balance to Lift Price

Last year, prices crept up every month. Although gains may decelerate to a certain extent, we expect prices to continue to ascend. The national median existing single-family home price in the first quarter was $232,100, reflecting an increase of 6.9% year over year. This marks as the fastest growth since the second quarter of 2015 that registered 8.2% price appreciation.

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