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Stock Strategist

Our Top Housing-Related Pick

We think demand is poised to rebound, despite recession fears, and we expect Lennar to benefit.

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We’ve been generally disappointed with the strength of the U.S. housing market so far in 2019. Indeed, key indicators of housing demand, including existing-home sales, construction permits, and housing starts, are all down year over year through the first eight months of the year. However, several favorable developments have emerged over the past few months that, in our view, point to a rebounding housing market, as declining mortgage rates and moderating home prices spur demand. First, the public homebuilders reported 7% order growth during the second quarter after two straight quarters of year-over-year declines. Similarly, year-to-date new-home sales are up 4% year over year. Second, existing-home sales increased 1% in July and 3% in August after 16 consecutive months of year-over-year declines. Finally, based on our analysis, underlying housing demand is still outpacing supply.

However, as the trade war with China escalates and with the yield curve recently inverting, the specter of an imminent recession may be keeping some buyers out of the market. While we can’t predict when the next recession will begin, nor do we assume that one will occur over our 10-year housing forecast, we are confident that when it does arise, the effect on the housing market will be nowhere near as severe as it was during the last recession. In our view, tight lending standards and the underproduction of new homes during the current cycle should keep supply and demand more balanced during the next economic contraction.

Brian Bernard does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.