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Equity Residential (EQR), PulteGroup, Inc. (PHM): Is the Housing Market Booming Again?

According to data just released by the Department of Commerce, construction of new homes is now at its highest rate in almost five years. The report noted that starts in March were up an astounding 47% over the same period last year. That’s the largest year-over-year growth since 1992.

Overall housing starts rose 7% from February to a seasonally adjusted annual rate of 1.04 million. That’s the highest annual rate since 2008. It’s also a lot higher than the 933,000 starts that economists were expecting. Further, the government revised February’s housing start rate up from 917,000 to 968,000. From all appearances, housing appears to be on the cusp of booming again.

Even anecdotally we’re beginning to see a quickened pace in the housing market. My wife and I put our house on the market late last month and in less than three weeks we were offered full price for our home. While all real estate is local, even local trends are affected by the national picture. So as those trends have indicated a gradual recovery in housing, the overall pace of activity appears to be picking up.

I will point out that there are a couple of notes of caution in the report. Building permits, which are a sign of future demand fell by 3.9% in March to a rate of 902,000. Further, the biggest driver in the housing report is building starts for apartments. Starts for buildings with at least five units rose 27% from February to the highest rate since 2006.

There still is a bit of a sour taste when it comes to housing, meaning apartments are a better option for some than living with mom and dad. This trend has been a key driver in the performance of apartment REIT’s like Equity Residential (NYSE:EQR) over the past few years. The company currently has 2,400 apartment units under construction with another 4,200 units still to be developed. As you can see in the following chart, demand for apartments is outstripping supply which is causing low projected vacancies:

Source: Equity Residential Investor Presentation

However, according to a recent survey from PulteGroup, Inc. (NYSE:PHM) the millennials (those aged 18-34) who make up the core rental market, don’t plan on being lifelong renters. In fact, the survey indicated that 65% of those with incomes of $50,000 or greater have an increased intention to buy a home than they had last year.

That likely means we will need to build more homes as we still remain below the long-term equilibrium line of 1.6 million starts. Despite that, homebuilder profits have been exceptional of late as builders are seeing an increase in both the price and the size of homes. So, even as starts remain below the equilibrium number, it’s still profitable to build a home.

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