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By James Tan | Broker in Elk Grove, CA

Goldman Sachs Bets On Housing Recovery

NEW YORK CITY-Given sufficient job growth and supportive public policies, the outlook for the US homebuilding market has been bumped up from 'neutral' to 'attractive' by Goldman Sachs, a sign that new construction in the single-family housing market could gather speed over the next several years, the firm’s equity research arm said in a new report on Monday.

GS analysts Joshua Pollard and Anto Savarirajan wrote that housing has a “long list of positives,” including renewed home price appreciation, a decline of shadow supply and a lower risk of another price shock – all indicators that buyers are coming back to the market.

“The super cyclical housing market has turned and a strong recovery in new home sales is ahead,” the analysts wrote. “Over the last year, a number risks to the housing market have abated, giving us confidence that rising home prices will drive a three to seven year up-cycle in the US housing market.”


 

According to the report, home prices are rising already, particularly in markets that saw heavy deflation since 2006. While the industry closely watches the S&P Case-Shiller Index – which measures the three-month moving average of home prices and is reported on a two-month lag – the report says asking prices as measured by housingtracker.net (shown above) have steadily increased to nearly 4% year-over-year, showing that home price appreciation by both investors and consumers is just a few months off. And as long as affordability remains at “attractive levels” and mortgage lending doesn’t tighten, GS suggests that new home prices could rise by 9% to $255,000 from $233,000 currently, or 30-year mortgage rates could rise to 120 basis points to just under 5%.

New construction is also expected to tick up. GS says housing start forecasts are one million in 2013 and 1.5 million for 2015, a 20% to 30% compound annual growth rate from 2011, the analysts wrote. In addition, public builders are expected to take market share during this recovery. GS raised ratings for homebuilder companies like KB Home (KBH), Toll Brothers Inc. (TOL),PulteGroup Inc. (PHM) and M.D.C. Holdings Inc. (MDC) based on stable earnings, success in high barrier to entry markets and potential for home price appreciation.

 

 

Growth in new home sales could also see a 50% spike, the analysts wrote. Based on historical employment patterns and previous recoveries, a return to 600,000 to 700,000 new home sales could add another 750,000 to 1 million nonfarm payrolls, or 30,000 to 42,000 per month, over two years.

“As we look back at previous major housing recoveries, 1975 and 1991 began with negative jobs growth while nonfarm payrolls declined during the first three years of the 2001-2006 housing bubble,” the analysts wrote, citing the chart above. “In each case, the home sales recovery was fueled by home price improvement, driving new job growth and those jobs creating a fresh wave of demand that supported a multi-year recovery in housing." 

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