Experts are predicting a slowdown in the US housing market and some S&P/ASX 200 (Index:^AXJO) (ASX:XJO) stocks could be in the firing line.
Several of these stocks such as the Reliance Worldwide Corporation Ltd (ASX: RWC) share price, James Hardie Industries plc (ASX: JHC) share price and Boral Limited (ASX: BLD) share price are already under pressure but not all of them deserve to be sold off, according to Credit Suisse.
The broker downgraded its US housing starts forecast to 3% (or 2.6% for single-family homes) for 2019 compared to the 12-month trailing rate of 4.5%. The downgrade is even more significant when compared to expectations of around 7% at the start of 2018.
US housing slowdown
While the US housing market is not homogenous (housing in some states are holding up well), the revision is relatively consistent with conversations I've had with a US property manager and realtor based in Chicago in November.
He was expecting house price growth to halve in 2019 from around 12% the year before, which isn't ideal but it's at least still growing compared to the Australian housing market.
What's interesting is that housing affordability in the US is improving with Credit Suisse noting that mortgage rates have declined 36 basis points from the November peak, while home loan rates are rising in Australia with the Australian Financial Review reporting that National Australia Bank Ltd.'s (ASX: NAB) digital lender Ubank is the latest to lift mortgage rates to offset rising funding costs.
Coming back to the US, the slowdown is still not good news for ASX building material suppliers even though conditions are better over there.
Best and worst
But there is an area of the US housing market that is looking upbeat – and that's the renovation and remodelling (R&R) segment.
"High home equity, a homeowner base locked into legacy low mortgage rates, and expectations for continued home price appreciation is expected to underpin R&R demand," said Credit Suisse in a note released yesterday.
"The team expects 4-6% growth in FY19, higher than the growth in new housing starts, driving a preference for more defensive end-market exposure."
This is why the broker rates Reliance Worldwide as the best pick in the sector as the plumbing solutions company is leveraged to the R&R market and has little exposure to new construction.
"Despite having de-rated approximately in line with peers, Reliance has almost no exposure to new residential construction, and anecdotal evidence suggests trading performance is tracking well," said Credit Suisse, which has an "outperform" recommendation on the Reliance share price.
"Further, we expect margins to improve into 2H. While still not cheap on a relative basis (30% PE premium to the ASX200); it trades at absolute P/E lows."
While James Hardie is more exposed to new housing construction at around 40%, the broker also thinks its worthy of an "outperform" recommendation due in part to its market share gains.
However, Boral is the one that is probably the most affected by the slowdown in US residential housing construction as 46% of its business is leveraged to that part of the market.
Credit Suisse thinks that weak conditions in the previous quarter will persist in the current quarter and warns that Boral is likely to miss its US dollar profit guidance and reach the low end of its Australian dollar guidance.
