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With tax law not positive for housing, top analyst finds value away from homebuilders

  • The GOP tax law "secretly" removed a subsidy for homeownership, Evercore ISI analyst Stephen Kim said, which is one reason he's looking at stocks of building products makers.
  • While the cutting of the mortgage interest deduction to $750,000 from $1 million received a lot of attention, the doubling of the standard deduction will also hit the housing market, he said.
  • He also thinks valuations for homebuilders have reached record levels.

The Republican tax law "isn't a positive" for housing because it "secretly" removed a subsidy for homeownership, top housing analyst Stephen Kim told CNBC on Wednesday.

While the cutting of the mortgage interest deduction to $750,000 from $1 million received a lot of attention, the nearly doubling of the standard deduction will also hit the housing market, he said.

"The vast majority of people who are currently itemizing their taxes will not do so anymore because they won't need to," the Evercore ISI analyst said in an interview with "Power Lunch."

"If you don't itemize your taxes, you don't qualify for the mortgage interest deduction, period. So this is sort of a backdoor way of removing a subsidy for housing that we've seen in this country for almost a century."

A contractor moves lumber for a house under construction in the Norton Commons subdivision of Louisville, Kentucky.
Luke Sharrett | Bloomberg | Getty Images
A contractor moves lumber for a house under construction in the Norton Commons subdivision of Louisville, Kentucky.

Because of those changes, he prefers stocks of building products makers over the homebuilders.

"They are a little bit more exposed to renovation and other international and commercial markets," said Kim, who ranked No. 1 in Institutional Investor's 2017 All-America research team for homebuilding and building products.

It's been a big year for homebuilders, with LGI Homes and KB Home up more than 100 percent in the last 12 months. D.R. Horton surged more than 90 percent and Pulte rallied more than 80 percent.

That run-up is another reason Kim believes there is more value in building products stocks.

"The valuations for the homebuilders have reached levels that are far beyond anything we've ever seen given the fundamental backdrop," he said. "Frankly, 2017 was a power move largely driven by multiple expansion. The actual estimates for the homebuilders didn't rise really that much from the beginning of the year to the end of the year."

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