Barclays: Trends Suggest Recovery is Sustainable

The housing recovery is strengthening and turning onto a sustainable path, Barclays said in a report Wednesday.

According to the firm’s U.S. Housing report, single-family housing starts are expected to trend upward, matching the strength of multi-family starts that has driven the housing recovery over the past year. Barclays also anticipates that home price indices will close out the year strong, suggesting a broadening and lasting recovery.

The rising supply and steady sales pace of single-family starts apparently encouraged homebuilders. The National Association of Home Builders (NAHB) Housing Market Index rose from 13 in mid-2011 to 35 as of July 2012. The rising index reflects the organization’s optimism in single-family sales, which in the past have been a reliable indicator for single-family starts as supply tries to keep up with demand.

“This suggests to us that single-family starts will have to rise just to keep new home inventories at historical lows. Based on our macro forecast, which has the U.S. remaining in a moderate growth environment, we forecast that housing starts will average 732,000 in Q2 12 and 760,000 in Q3 12. Against a gradual pickup in new home sales to an average of 357,000 units in Q2 12 and 363,000 units in Q3 12, months’ supply of inventory should continue to gradually move lower to 4.3 months,” said Barclays in the report.

Based on improved affordability, increased demand, and falling inventory, the firm projected a year-over-year home price increase of 2.9 percent by the end of 2012. The report cited greater than expected increases in the S&P/Case Shiller Home Price Indices in March and April, pointing to the spread of price increases even in regions hit hardest by the housing crisis.

Barclays noted that its baseline forecast assumes that policymakers will work to prevent the European financial crisis from becoming a global issue on the scale of 2008’s crisis. The firm also assumed that U.S. legislators will not impose any excessive financial tightening. If these events occur, Barclays said, the risk of another U.S. recession will increase, and housing demand will likely fall off, leading to decreased prices.

Given this information, Barclays issued its prediction that second-quarter profits for homebuilders are likely to increase, with new orders showing the largest year-over-year increase since 2005. This momentum is expected to continue through the second half of 2012, leading to a relatively successful year.

Barclays also expects to see firm and favorable building prices during the spring selling season, with homebuilders cutting incentives and increasing prices. Several homebuilding companies, including Hovnanian Enterprises, Toll Brothers, and KB Home, reported favorable pricing trends during the quarter. Only two builders-KB Home and Beazer Homes USA-are expected to be unprofitable.

Based on the happenings in the year’s second quarter, Barclays announced that it is adjusting its ratings on several building material credits that are likely to benefit from the upturn in housing demand. Owens Corning was upgraded to from Market Weight to Overweight, while Masco, USG, and Whirlpool moved up from Underweight to Market Weight.

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