US housing starts delivered a big upside surprise today, 1.608 million December starts vs 1.3 million forecast, and the strongest number in more than 13 years (2006). This is a major upside breakout — since 2008, US starts have been stuck in a range of 1.0-1.3 million start.
– US housing cycles can be a positive contributor to GDP growth as each new housing start creates 4 full-time jobs. Thus, an increase in annualized starts by 500,000 can add 2 million to payrolls.
– Housing is tied to demographic changes and the millennials entering prime income years is actually a big tailwind for starts. We expect US housing starts 2020-2029 to be 50%-90% above the level seen in in the past decade (1.5-1.9 million vs 1 million/yr on avg).
– Thus, housing and the associated “heavy asset” boom associated with the rise in starts is central to our thesis for equity markets in the next decade.
Bottom line: the inflection in US housing is supporting our expectation that US GDP growth could be stronger than expected and thus, provide greater upside to EPS growth. Moreover, one should remember, we are the in “Golden 6M” related to US homebuilders.
POINT #1: Golden 6M to own US homebuilders. Since 1999, outperformed Nov-April by 2,400bp.
#2: US Housing starts breaking out of the 10-yr malaise…
POINT #3: Because of the rise of Millennials and pent-up demand, 2020-2029 annual housing starts could be 50%-90% above past decade levels.
Household formation in the past decade outpaced US housing starts. So we are entering 2020 with a “shortage” of homes. About 200,000 homes per year a destroyed, so housing starts should EXCEED household formation due to this impact (2mm homes are destroyed every decade).
— Each 1 housing start creates 4 full-time jobs. Thus, adding 500,000-900,000 in US starts per year is 2mm-3.6 million additional jobs and that is also a lot of GDP growth.
POINT #4: The rise in Millennials is also arguing that US home prices could boom in the next decade.
As shown below, growth in 30-50 year old is linked to US home price gains (see below). As growth in household formation = improved supply demand balance.