HOUSING SECTOR

It continues to be difficult to find value in U.S. stocks with the S&P 500 flirting with an all-time high, but one place investors might want to look is housing. Equities levered to the U.S. housing recovery appear to be poised for outperformance given that demand is picking up, supply is tightening, affordability is reasonable, credit standards are easing, and households have low leverage. “After more than six years into this recovery, we believe there are fewer opportunities in U.S. equities that offer stronger growth and cheaper valuation than housing,” said Dubravko Lakos-Bujas, an equity strategist at J.P. Morgan. If housing stocks were their own sector, he found that it would offer the strongest earnings growth and second-cheapest valuation. Average estimates suggest housing stocks will grow earnings by approximately 50 per cent in 2015 and 2016, compared to 30 per cent by S&P 1500 companies. “As for valuation, we believe the domestic-linked housing sector does not deserve multiples in line with the cheapest materials sector, which has meaningful exposure to China,” Lakos-Bujas told clients. He highlighted some key variables for a housing recovery, including further strength in the job market, elevated levels of consumer confidence and relatively low interest rates. Housing is sensitive to interest rates and the U.S. Federal Reserve is poised tighten policy, but Lakos-Bujas noted that the risk posed by rising rates should remain limited in the coming quarters. That’s because long rates, which are more important to the housing market, are already pricing in Fed rate hikes. “Even if the Fed surprises by tightening faster than what the market anticipates, J.P. Morgan expects to see a curve flattening and conventional mortgage rates should not move nearly as much as the funds rate,” the strategist said. Lakos-Bujas noted that so-called “bear-flatteners,” where short-term interest rates increase at a faster rate than long-term interest rates, are not associated with negative performance for housing stocks. Indeed, home builders have outperformed the market during these periods. There is no shortage of ways to play this theme (J.P. Morgan listed 100 ideas), with stocks in several sub-sectors represented. Some of the names highlighted are machinery companies such as Stanley Black & Decker Inc. and Graco Inc., household durables like Whirlpool Corp. and LaZBoy Inc., and specialty retailers including Home Depot Inc. and Williams-Sonoma Inc. Banks, mortgage lenders and insurance companies were also included on the list, with FirstRepublic Bank and Genworth Financial Inc. making the cut. Some of the others included were Weyerhaseuser

Co. representing the timber space and American Residen

tial Properties Inc., one of several single-family REITs highlighted, along with real estate management firms such as Re/

Max Holdings Inc.