Signs of life in U.S. real estate

Housing cycles have historically lasted multiple years, says David Hollond, CIO of U.S. growth equity mid- to small-cap at American Century Investments. He manages the Renaissance U.S. Equity Growth Fund.

He adds, “We’re still [in] mid-recovery and [that] cycle is very much intact. Normalized housing starts are in the 1.5-million-unit range, and currently we’re at a level of around 1 million housing starts. Just to get back to a normal level, we’ve got 50% upside.”

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So what’s currently driving the market? We’ve got “low mortgage rates, an affordability index near historically high levels–it’s cheaper to rent than to buy–and then there’s pent up demand,” says Hollond.

He adds, “There are a lot of people who have been living in apartments or with their parents who [now] want to buy houses.”

But housing prices have started to rise. And “this is prompting sellers to sell [since] they’ve been waiting for better prices. [And] now that they’re starting to sell, there’s more inventory, which is prompting buyers,” says Hollond.

Many buyers are also getting over the fears that they’ll lose money due to house prices falling. Now that prices are rising steadily, they’re taking the plunge.

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“The home turnover this has been driving is especially good for suppliers or remodelling-driven companies,” says Hollond. “If I think about how investors can benefit from the housing recovery, an optimistic view is the recovery can be what drives an economic recovery.”

He adds, “Broad exposure to equities can benefit from housing.” In terms of sectors, he says the market has a “broad impact across many sectors…In the consumer discretionary sector you’ve got: home builders; home centres like Home Depot and Lowes; remodelling companies; and industrials.”

Industrials include companies like Lennox, which sells air conditioning units to residential homes. There’s also materials and paint companies, and those that build fixtures like cabinets. Mortgage brokers will also benefit as housing prices rise.

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“The industry dynamic about housing is you can benefit from a lot of different sectors,” says Hollond. “The lessons investors should keep in mind are…if we were to get back to a normalized housing starts range—of about 1.5 million—from here, I don’t think there would be any reason to get concerned.”

But “if we started to see [that range] hitting high levels…above the normal average, that would start to make me nervous as an investor. I would be wary about those [levels] being sustainable.”

However, says Hollond, “we’re still very depressed [at the current level]. Even though things have been improving for a year and half, it’s still a depressed market relative to the average.”

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