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Why PulteGroup is optimistic about a multi-year housing recovery

Brent Nyitray, CFA, MBA

Why PulteGroup expressed optimism with its 1Q 2014 earnings (Part 5 of 5)

(Continued from Part 4)

Overall, PulteGroup is optimistic about the future

Pulte saw indications that the spring selling season is shaping up to be reasonably strongly. The company believes we’re in the early stages of a multi-year housing recovery. The big question for the builders is how they will be able to drive revenue growth in the future when they aren’t able to rely on simply raising prices. This could end up being good news for the U.S. economy, as it will mean more building, which means more jobs. The lackluster growth in the housing sector has been the Achilles’ heel of the U.S. economy.

The macro picture for the builders looks good

People forget that a housing bust is getting pretty long in the tooth. The housing market peaked in 2006, which was eight years ago. A lot of excesses from the bubble have been worked off, and in many ways, we’ve seen the opposite problem—a shortage of existing and new inventories. Part of this trend has been due to foreclosure laws, and part has been due to caution on the part of the builders.

Take a look at the above chart. It shows housing starts going back to 1959. You can see that housing starts have averaged about 1.5 million units going back that far. Since the bust, we’ve been about half that number. That’s a lot of under-building over the past six years. The only thing that has kept even a semblance of normal supply and demand has been the low household formation numbers that have accompanied the Great Recession. The important thing to keep in mind is that those numbers weren’t due to fertility rates 25 years ago. They were due to a lousy economy. This means there’s tremendous pent-up demand that will unleash once the economic recovery filters down to the young. Homebuilders with lots of exposure to the first-time homebuyer—like D.R. Horton (DHI) and PulteGroup (PHM)—will benefit from this demand the most. Lately, it has been the luxury end of the market that has been performing the best—names like Toll Brothers (TOL) and Meritage (MTH). Investors who are interested in trading the homebuilding sector as a whole should look at the S&P SPDR Homebuilding ETF (XHB).

To learn more about stocks and ETFs that stand to benefit from a housing recovery, check out Market Realist’s Real Estate page.

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