The Next Phase of Housing’s Recovery: Which Five Investments Should You Own Today?

PIMCO’s top-down and bottom-up views identify several sectors poised to benefit from developments in U.S. housing.

This article originally appeared on on 18 February 2014.

PIMCO has significant top-down and bottom-up expertise dedicated to understanding the U.S. housing market cycle. In 2006, we warned U.S. housing prices were significantly overvalued, which led to our defensive positioning heading into the recession. In 2011, we turned bullish on real estate and added investments such as non-agency mortgage-backed securities, banks and homebuilders that we felt would benefit from an eventual recovery in housing prices.

The questions for many are what’s next for housing and, importantly, what are today’s investment opportunities? While each investor needs to consider their own financial situation and risk tolerance, here are a few big picture themes and bottom-up opportunities and sectors to consider now to capitalize on the next phase of the housing recovery cycle.

First, home equity is rising. The Federal Reserve recently cited positive data and trends with homeowners’ equity. One year ago, 22% of homes in America were in a negative equity position whereas today only 13% of homes with mortgages are underwater, according to CoreLogic. Game changer? Not yet, but the trend is quite positive. Going forward, U.S. consumers are likely to spend more on remodeling, particularly as home equity and housing prices rise. In fact, Harvard’s Joint Center for Housing Studies is projecting home improvement spending will grow on average 10% in 2014. Home improvement companies are seeing the recovery in remodel activity starting with small projects like a fresh coat of paint, but increasingly large-scale projects such as kitchen and bathroom renovations should pick up. For the December quarter, a large Michigan-based home improvement company reported a double-digit increase in sales in North America driven by volume growth in cabinets, paint and windows. Investors should favor home improvement and appliance manufacturers that should benefit not only from a pickup in remodel spending but also a continued cyclical rebound in housing starts.

Second, companies are raising prices. Many housing-related companies cut capacity in the last recession in order to prepare for an eventual recovery. This has facilitated pricing power during the upturn. While U.S. housing starts are up over 20% annually in the past two years, according to the U.S. Census Bureau, the housing industry is still under-building. New home construction is running at 1 million units per year, well below long-term demand of around 1.4 million units. Moreover, housing inventory is near a 30-year low as a percentage of the working age population. Want more good news? Several companies, having cleaned up their balance sheets and downsized coming out of the last recession, are now in a strong position to benefit as more homes are built and remodeled. What specific sector should benefit most? Building materials! Many of these companies are now experiencing mid- to high-single-digit gains in both volumes and pricing. In terms of pricing, recent increases are continuing and coming on top of already large price increases for some companies. As evidence, a large Chicago-based building materials company with leading market positions was able to raise prices for gypsum wallboard, a key construction material, by 17% in 2012 and by 17% again in 2013, with additional price increases announced for 2014. When a firm’s sales growth is accelerating and the company has pricing power, that’s a good signal that you might want to own that company. Own building materials.

And lastly, the consumer is healing. Consumers have made significant progress deleveraging their balance sheets. In addition, the U.S. economy added over 2 million private sector jobs last year, according to the Bureau of Labor Statistics. While income growth remains modest, consumer confidence and “animal spirits” have improved due to higher equity and home prices and a supportive central bank. Consumers will likely open up their wallets more this year and take that vacation they have been putting off. Planes and lodging will be more crowded, so own airlines and hotels to benefit from the consumer’s improved ability and willingness to spend.

The U.S. housing market may have come a long way over the last two years. But we still see significant opportunity in the sector as the next leg of the housing recovery takes hold.

The Author

Mark R. Kiesel

CIO Global Credit

View Profile

Latest Insights


PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963), PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) and PIMCO Deutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Spanish Branch and Swedish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act, the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008 and the Swedish Financial Supervisory Authority (Finansinspektionen) in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-, Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia). This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd (Toranomon Towers Office 18F, 4-1-28, Toranomon, Minato-ku, Tokyo, Japan 105-0001) Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. Investment management products and services offered by PIMCO Japan Ltd are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorized. Valuations of assets will fluctuate based upon prices of securities and values of derivative transactions in the portfolio, market conditions, interest rates and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchange rates. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (107) FSC SICE Reg. No.001. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.), Tel: +886 (02) 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world.

All investments
contain risk and may lose value. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the author but not necessarily those of PIMCO and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2014, PIMCO.