It may be too soon to call a bottom in the housing market, but that’s not stopping UBS from pinpointing which geographical markets will be the first to rebound--and which single-family and multifamily builders will be most able to take advantage of the turnaround in those markets.
In a new Q-Series report released this morning, UBS analysts David Goldberg and Alexander Goldfarb selected Atlanta, Austin, Charlotte, Dallas/Ft. Worth, and Houston as their top picks for markets that will lead in a housing recovery.
The outlook for those five markets was optimistic because they exhibited stronger positive trends in demographics, economic growth, affordability, and inventory than the other eight markets examined.
Based on these same metrics, Orlando, Las Vegas, Phoenix, Riverside, and Tampa fared the worst. For-sale inventories and declining home sale prices have increased competition among single-family builders, a fact that also poses hurdles for apartment fundamentals.
San Diego, Los Angeles/Orange County, and Washington, D.C., were identified as “coincident” markets, meaning they were somewhere in between market leaders and market laggards.
Using the results of this analysis, Goldberg and Goldfarb also calculated home builders’ and apartment REITs’ exposure to each market and were able to forecast which companies would be the best positioned for a housing rebound. Out of the nine public home builders in Goldberg’s coverage universe, The Ryland Group was the big winner. With the release of the report, Goldberg upgraded Ryland stocks to a buy status.
Ryland’s geographic diversification--it has no more than 10% of its business concentrated in any one geographic market--merchant builder model, and strong balance sheet puts it in a position to take advantage of a market return quickly.
Moreover, the company has a higher concentration in markets with more favorable outlooks and less of a presence in more troubled markets such as Las Vegas, Phoenix, and Tampa. In a related conference call, Goldberg pointed out that, based on community counts, Ryland has roughly 33% of its communities spread across top pick markets Atlanta, Dallas, and Houston versus an average of 24% for the group.
On the multifamily side, Essex Property Trust was Goldfarb’s buy-rated stock. He pointed to the company’s exposure in coastal California and Seattle--markets less affected by the housing downturn--as major pluses.
During the call, Goldfarb also pointed out that the market report was slightly more reflective of single-family building than multifamily activity. “A good apartment market is where single-family remains in check,” he explained. Thus, as the single-family market has struggled, the apartment industry has felt some fallout.
He also stressed this point in the report: “There has not been an influx of new renters as the housing market collapses--indeed we are seeing competition from rental homes in some markets. For example, 14% of Camden Property Trust’s move-outs in Las Vegas are to rental homes.”