REAL ESTATE NEWS...Housing Stocks Are Expected to Soar in 2016

By Tony Dreibus

This month's positive jobs report all but eliminated any uncertainty about whether the U.S. Federal Reserve will raise interest rates. But while conventional wisdom may lead investors to believe that means an end to a strong housing market, they would be wrong, according to analysts and economists.

Companies that build homes likely won't see much, if any, effects on their business even if the Fed decides to increase rates this month. A strengthening economy, an improved jobs outlook and a flood of young buyers looking for homes will be enough to overcome any increase in the base interest rate, says Bill Irving, a fixed income portfolio manager at Fidelity Investments, who helps manage $63 million in assets.

"We have more income growth and more people employed (that will) be more than enough to accommodate an increase in interest rates," Irving says. "The availability of credit is better as banks loosen their lending standards, so while the cost of credit may rise, it's going to be offset by an increase in the availability of credit."

Homebuilders had a good year. Homebuilders have had a good year, thanks to a slowly improving economy, declining unemployment and increased credit accessibility. Shares of D.R. Horton (ticker: DHI), the largest builder by revenue, have jumped by nearly a third in the past year. Lennar Corp. (LEN), the second-biggest, improved 18 percent.

Fourth-quarter 2015 earnings and revenue topped expectations for DHI stock. Earnings per share totaled 64 cents, topping analyst estimates for 62 cents. Revenue was $3.2 billion, exceeding forecasts for $3 billion.

Lennar revenue in the third quarter of 2015 also topped projections, coming in at $2.5 billion, beating Wall Street forecasts for $2.4 billion. Earnings of 78 cents a share for LEN stock were just below forecasts for 79 cents per unit.

The Case-Shiller Home Price index has gained 4.9 percent this year. Increases in home prices likely will slow later this year, Irving says, but any stagnation will be offset by an increasing number of buyers looking for houses.

Jobs report likely ends the Fed's waffling. The Federal Reserve has been waffling about whether to raise interest rates for the first time in nearly a decade. While the need for a base interest rate near zero isn't warranted as the economy improves, some indicators noted the U.S. wasn't far enough out of the economic woods to raise rates.

Then came the Dec. 4 jobs report, which showed U.S. employers expanded payrolls by 211,000 people in November, removing what doubt was left that the Fed would raise interest rates during its meeting this month. The unemployment rate in the U.S. is at a seven-year low, another indicator that the economy is strong enough to withstand a rate hike.

If the Fed increases interest rates, as it's expected to, long-term borrowers likely won't feel any effects on their payments, unlike short-term borrowers with lending terms of less than five years, says Ernest Goss, an economist at Creighton University, who conducts a monthly study of rural bank presidents to gauge economic health in rural areas.

Homebuilders could see a surge in sales as buyers who have been waiting to purchase a home may jump into the market, worrying that interest rate hikes will continue and boost the amount they'll pay, Goss says.

"A modest rate increase could stimulate home buying," Goss says. "A lot of people may say 'interest rates are rising so I better buy,' so I think it will be good for sales -- I would expect home sales to rise simply because people have been sitting on the sidelines."

Economic growth is still 'very weak.' Still, there are factors that could negatively affect homebuilders and associated companies' bottom lines, analysts say.

Chad Morganlander, a money manager at Stifel Nicolaus & Co., who helps the firm manage about $170 billion in assets, says in a research report that the U.S. economic recovery "remains very weak by historic standards."

"Top-line growth, excluding currency effects, will likely be slower than what we had gotten used to from the 1980s through the first part of the 2000s," Morganlander says. "Consequently, an important return driver for equity valuations is constrained."

Still, things are improving, albeit slowly. Unemployment has been almost halved since 2009, the total number of hours worked has grown by about 10 percent over that time frame and more jobs were added. Capital investment has grown by 30 percent, he says.

Economy gains are enough to offset a rate hike. Growth, even if it is slower than what investors have seen in the past, is good for home sales and homebuilders, so any hike likely won't be enough to slow the freight train of home buying seen in the U.S. this year.

Another positive factor for homebuilders is that the excess supply of houses has been snapped up in recent years, meaning more houses are needed to keep up with demand. That makes for a rosy outlook for companies such as D.R. Horton and Lennar.

"We have to think about why the Fed is raising rates in the first place -- they think the economy is strong enough to bear it," Irving says. "I'm not an equity analyst, but what I will tell you is that the environment is going to be supportive to people who want to buy homes ... and the need to build homes."