Goldman Sachs sees a multiyear boom in housing and picks its best stocks to play it

Published Fri, Feb 19 20218:22 AM ESTUpdated Fri, Feb 19 20219:24 AM EST

Jesse Pound @/in/jesse-pound @jesserpound

The red-hot housing market shows no signs of slowing down in the years ahead, and several homebuilding stocks are set to benefit, according to Goldman Sachs. Residential real estate has been one of the strongest sectors of the U.S. economy during the Covid crisis, as lockdown periods increased demand for more space, and stimulus efforts bulked up savings accounts for many Americans. Housing starts actually fell in January , according to the Commerce Department, but building permits and builder confidence are high, suggesting that January's numbers were largely a seasonal blip. The price of lumber has also risen dramatically as the demand for housing has strained the supply of building materials. "Based on the current starts pace, we believe there is [about] 5.5 years of demand, suggesting above average growth for the builders across our coverage will hold through 2022, at least," Goldman said. As part of the bullish call, Goldman upgraded KB Home to buy from sell. The stock is up by 2.6% over the past year, lagging the iShares Home Construction ETF by more than 20 percentage points. "In our view, its build-to-order strategy leaves it well-positioned as we enter the year, with a backlog up 54%, bucking seasonal norms and providing greater visibility to near-term EPS," Goldman said. However, the firm does not believe the homebuilding sector will be a winner-take-all situation for investors. Goldman also has buy ratings on D.R. Horton and PulteGroup . The demand in housing comes from more flexible housing arrangements, demographic shifts and low interest rates, Goldman said. The firm came up with its long-term view of housing demand by examining the rate of conversion from renters to owners and the rate of homeownership in different areas. Of the top 28 U.S. metro areas, Goldman listed Tampa, Florida, and Phoenix among the places with the highest rates of renters converting to homeownership, while Denver and Austin, Texas, are among the cities with the tightest housing supplies.

A contractor carries building supplies for a house under construction in Lehi, Utah, U.S., on Wednesday, Dec. 16, 2020.

George Frey | Bloomberg | Getty Images

The red-hot housing market shows no signs of slowing down in the years ahead, and several homebuilding stocks are set to benefit, according to Goldman Sachs.

Residential real estate has been one of the strongest sectors of the U.S. economy during the Covid crisis, as lockdown periods increased demand for more space, and stimulus efforts bulked up savings accounts for many Americans.