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For most Americans, their home is far and away their biggest investment. According to the Federal Reserve, the average American has about 75% of their net worth tied up in their primary residence. And for most families, their biggest investment has paid off big time. The average family that rents their primary residence has a median net worth of just about $4,800. By comparison, for homeowners this figure is a whopping 35 times greater, coming in at over $171,000. Even better, the median home-owning family saw their net worth skyrocket +40% from 1992 to 2001. The average net worth for renters over this same time period increased just +20%, about half the pace of growth. Given the dramatic increases in home prices we've seen in recent years, it should come as little surprise that talk of a "housing market bubble" is so rampant in the popular press. The financial press has devoted endless coverage to this issue, and not a day goes by without another pundit weighting in on the issue. Clearly, the health of the housing market is the key fundamental factor behind the performance of the homebuilding stocks. As house prices have moved sharply higher over the past few years, homebuilders have consistently been among the market's best-performing sectors. In the event of a prolonged pullback in home prices, clearly, the sector would be highly vulnerable. The argument from the housing bears is simple: rising interest rates will make houses less affordable, which, when combined with some speculative high-risk buying in recent years, will cause a collapse in real estate prices. Such a collapse would, of course, severely undercut the performance of most homebuilding stocks. On the bullish side, some believe that rates will remain relatively low over the next few years. As a result, houses will remain affordable. And despite their recent run-ups, homebuilding stocks remain incredibly cheap on most valuation measures. Therefore, if the housing market remains relatively strong, then the group should continue its bullish run. Where Is The Housing Market
Headed From Here? First of all, it's a sweeping oversimplification to speak of a single "housing market" in the United States. The U.S. housing market is actually composed of many sub-markets; although some have seen extraordinary growth in recent years and look vulnerable to a slowdown, others remain very cheap. One way to look at these disparate regional markets is to compare median incomes in a particular market with median household incomes. This basic data, combined with regional financing availability, is used to calculate an economic figure called the housing affordability index. The basic premise is that the higher the number, the easier it is for the median income-earner to afford the median home. In the chart below I've included the housing affordability index for several key markets around the U.S. It's clear that while some markets are starting to look bubbly, some, including several major urban markets, are still well supported.
Although a short-term slowdown is likely to take place in certain markets, over the long haul demographics are highly supportive of continued strength in real estate. The U.S. Census Bureau estimates that our nation will add more than 1.2 million new households every year for at least the next 20 years. With interest rates low, many of these new households will be looking for a place to live, and that often means buying a home. A large portion of these new households will consist of immigrants looking for starter homes, which will help boost demand. The pace of immigration has been steadily increasing since the 1960s. The 1990s were a huge decade for new immigrants to the U.S., with about 1.1 million annually entering the U.S. through legal means. And the longer immigrants stay in the U.S., the more likely they are to buy homes here. Immigrants who arrived on U.S. shores 40 years ago are just as likely, or perhaps even more likely, to own houses than U.S.-born citizens. This means that the big immigration boom of the 1980s and 1990s will start hitting the housing market in a big way over the next decade or so. Traditional hotspots for immigration across the Northeast and Midwest will be the big winners from that trend. Another bullish factor for the housing industry involves the so-called "echo-boomers" -- the children of the massive Baby-Boomer generation. Many of these individuals are now entering their peak income years. As incomes rise, they'll be looking to move into starter homes as well.
And, of course, the older Baby Boomers, now nearing retirement will also need a place to live. Increasingly, they're trading up to luxury or vacation homes. The Boomers' housing needs are changing, not diminishing. States like Florida, Arizona and Nevada have seen a dramatic surge in housing demand over the past few years thanks to the fact that they've attracted millions of retirees. Data from the U.S. Census Department suggest that U.S. retirees are better off today financially than ever before. As such, they're likely to demand high-quality housing. In the short run, and as my chart indicates, there are pockets of speculation in real estate. In recent months, for example, there's been a surge of interest-only mortgage loan activity in some markets -- interest-only loans are the most aggressive form of mortgage financing. And surveys in some markets suggest that as much as half of new homebuyers are purchasing houses for speculative purposes. They have no real intention to live in the house, but instead intend to simply flip it to a new buyer. Bottom line: Although I don't believe the worst-case scenario (a prolonged housing market recession) will unfold, in general, I agree that a moderate slowdown is imminent in certain regions of the U.S. housing market. Despite this short-term concern, I believe homebuilders will prove to be long-term winners. Therefore, when the bubble starts to deflate and homebuilding stocks pull back from their recent highs, a variety of homebuilders and real estate firms could make compelling value plays. With this in mind, below you'll find a brief look at several of the key players in the homebuilding group. And in the analysis that follows, my staff and I will examine two of our favorite homebuilding stocks... Important: To view the remainder of this article, in which StreetAuthority.com founder Paul Tracy and his staff provide a table of key industry players, as well as in-depth profiles of their two favorite homebuilding stocks, you'll need to subscribe to our premium Market Advisor newsletter. Please visit one of the following links to continue...
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