The US building and construction sector is running at two speeds. The housing sector is buoyant as ...
The US building and construction sector is running at two speeds. The housing sector is buoyant as homebuyers take advantage of cheap mortgage rates, while commercial building has slumped due to lack of demand among cash-strapped corporates.
Despite disappointing August housing construction start figures, market watchers say residential construction is likely to remain strong in coming quarters. Housing starts were down by 2.2% in August from July, against market expectations of a 1.5% increase. But with mortgage rates around 40-year lows, few expect the figures to constitute more than a brief dip.
Britannic US equities investment manager Alison Sinclair believes much of the strength in homebuilding is due to demographic reasons rather than economic ones.
'People are living longer and the family unit is smaller, with people striking out on their own,' she says. 'Plus there is population growth from immigration.
'Financially, it's a good time for people buying houses, including new ones, because mortgage rates are low.'
Demographic-led demand is likely to continue driving the new housing market even if the market slows, she adds.
'The market could slow but it shouldn't affect the market for new properties as much as the used home market because, with demographics the way they are, there is still a need for new homes over time,' Sinclair says.
Commercial construction is suffering, however, as companies continue to cut staff and capital expenditure remains off the agenda. With capacity utilisation at just 76% in August, it appears an economic upturn will need to be under way before further investment is likely.
'It's really in the doldrums because it is very much tied to the economy,' Sinclair says. 'It's difficult to see when there will be a pick-up because companies are cutting back on costs rather than expanding.'
Companies involved in the construction market, particularly suppliers of building materials, are also seeing a rather unbalanced flow of business. Sinclair believes the most attractive stocks in the sector are therefore pure homebuilding companies.
'A lot of the homebuilders are only involved in that but a lot of the suppliers and engineers would be exposed to both sides of the market, doing well out of homebuilding while suffering on the commercial side,' she adds.
Andrew Hudson, head of the US desk at Friends Ivory & Sime, says the strength of the housing sector has led him to take overweight positions in retail DIY stocks. Mortgage refinancing activity in the US, where most home loan rates are fixed, is frantic as borrowers move to lock in lower interest rates.
'Homeowners can save quite a lot of money in the US by refinancing their mortgages at a lower rate on a fixed basis,' he says. 'And they can either retain their current level of borrowing or borrow more.
'It stimulates the consumer as there is more cash in the economy, and housing becomes a lot more affordable.'
Hudson says interest rates are likely to continue to support the sector, with few economic indicators suggesting the Federal Reserve is anywhere near to considering fiscal tightening.
Housing sector boosted by low mortgage rates.
Fed unlikely to tighten monetary policy soon.
Demographics positive for long-term demand.
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