How Big Is Wall Street's Housing Bet? Pretty Big
CNBC.com Senior Writer
Wall Street is hitching its bullish hopes for 2013 to an unlikely star, believing that a real estate industry that led the economy into the abyss is what ultimately will carry it back out.
While hopes that housing is about to turn a corner aren't entirely new, the extent to which optimistic stock market forecasts are pinned on the mercurial sector is striking.
"We're seeing much more evidence of a meaningful recovery in housing," said Joe LaVorgna, chief U.S. economist at Deutsche Bank. "The (household) balance sheet is better, the housing sector is better, we're seeing better motor vehicle sales. The cyclical side of the economy, which had looked very weak coming out of the last downturn, looks almost like (it could lead the recovery)."
These calls are coming at a time of year when Wall Street strategists and economists hold media briefing sessions to discuss their broad outlooks for the year. (Read More: Why Companies Still Aren't Likely to Invest—or Hire)
While forecasting is always fluid and target numbers for the stock market and economy almost always change along the way, some themes resonate.
During discussions at this year's events, the idea that real estate is ready not just to avoid being a drag but now come to the forefront of growth has become prevalent.
David Bianco, Deutsche's chief market strategist, is calling for a 1,575 target this year on the Standard & Poor's 500 fueled by expansion in price-to-earnings multiples. That will be driven, he said, by a healing in the U.S. economy which he said "has passed its housing crisis."
The recovery will be broad-based, according to the bullish calls, with commercial real estate especially poised to run higher.
Global real estate investment trusts provided returns of 24 percent last year, while U.S.-based REITS repaid investors with an 18 percent profit, said Marc R. Halle, managing director at Prudential Real Estate Investors.
(Read More: Meet America's New Landlords: REITs)
"Real estate is a real simple business, it's supply and demand," Halle said at Prudential's media event Tuesday. "It's building up demand if there's no new supply. Real estate seems to be in a pretty good position in that we're not creating any new competition."
Halle points to a 3 percent to 5 percent dividend yield on REITs and net operating income growth of 4 percent to show that the industry is on increasingly solid ground.
Prudential more broadly also is bullish on stocks, with an expectation of a 16 percent return on the S&P 500 that is predicated on housing-led growth in the U.S. as well as resurgent multinational companies.
"We are making progress on the confidence front in the U.S. The housing market has turned around," said Ed Keon, managing director and portfolio manager at Prudential's Quantitative Management Associates. "It seems to be that the economy is going to get some traction this year."
Of course, such a big bet can backfire, and that's probably why many of the strategists who think stock prices have every reason to surge higher aren't going all-in with their market calls.
"What happens in Washington is always an issue," said LaVorgna, who fears the debt ceiling talks ahead as well as the consequences of Federal Reserve monetary policy. "That's my hedge."
Indeed, Quincy Krosby, chief market strategist at Prudential Annuities, warned of "tremors" that foretell market problems ahead, while Keon conceded that while things are looking up, the coast is far from totally clear.
"There's still plenty to go wrong," he said. "My guess is that the worst of the financial crisis is behind us."