Report: Reasons to Be Bullish on Housing in the Long Term

February 20, 2019 by Tracey Velt
Report: Reasons to Be Bullish on Housing in the Long Term
A new report from Wells Fargo and L.E.K. Consulting says there is pent-up demand from a new generation of first-time home buyers and a low supply of single-family housing, which should drive long-term residential new construction growth. Concerns of a 2019 downturn in housing are overblown, with housing starts likely to show steady growth in the intermediate term.
As interest rates climbed higher over the course of 2018, declines in housing affordability combined with economic cycle concerns sparked worries for the residential new construction sector. However, as the expected pace of rate hikes has slowed in early 2019, affordability and homebuyer sentiment is improving. These factors coupled with historically low levels of inventory should help moderate declines in new residential construction should a broader economic slowdown occur. Considerably low supply and emerging demand driven by millennial household formation should further support long-term growth.
“The industry may face near-term turbulence, but strong tailwinds will help sweep through it with a new generation of homebuyers driving longer-term growth,” says Lucas Pain, Managing Director and Head of Americas Building Products and Materials practice at L.E.K. Consulting.
The study examines several key industry factors ― including housing starts, housing inventory, housing affordability and household formation― in order to forecast performance.
Among the study’s key findings:
“An economic recession may seem overdue, given historical trends,” says Harry Shaw, managing director and co-head of the Basic Industries sector in the Industrials Investment Banking Group at Wells Fargo Securities. “But given our industry specific observations on supply, demand and the level of key economic indicators, we expect the impact of any slowdown on residential new construction activity to be muted. The outlook for residential construction in 2019 is improving versus late 2018, and there are sufficient tailwinds to carry the industry through any near-term economic turbulence.”
Given the healthy longer-term outlook, industry participants should consider investment in both capabilities and capacity, especially in single-family housing, the study suggests. “A modest pullback could create attractive valuations and entry points for those willing and able to make opportunistic investments,” adds Casey Rentch, managing director, Industrials Investment Banking at Wells Fargo Securities.
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