NEW YORK (TheStreet) -- Just like last year, economists expect the economy to grow and housing construction to pick up in the New Year. But the big difference is, this year they think a strong economy will produce a housing recovery, and last year they thought it would be the other way around.
By any terms, the housing market's 2014 was a disappointment. Housing starts are on pace to be right about 1 million, up only about 7% after forecasts for as much as 30% growth this time last year, with the 5.4% 2014 gain in the Dow Jones U.S. Select Home Construction Index (ITB) badly trailing the market. Existing-home sales are still running about 500,000 a year short of the 5.5 million that are normal for a healthy market.
That's why predictions of a housing pickup this year are tinged with caveats and caution. But if the housing market does pick up enough to push new home starts 15% to 20% higher, that would add more fire to a jobs recovery that is already creating 250,000 new positions each month, including 321,000 in November.
"The market increasingly depends on fundamentals such as job growth, rising incomes and more household formation," Trulia.com chief economist Jed Kolko says. "But here's the hitch: These fundamental drivers of supply and demand haven't returned to full strength.''
At Bank of America Merrill Lynch housing maven Michelle Meyer says housing starts will rise about 20% to 1.2 million, existing-home sales will climb to 5.2 million, and home prices will rise about 3.6%. All three of those measures will remain far below where they were in 2006 if her predictions are true.
The problem isn't any secular change in young buyers' attitudes toward buying a home, Meyer and Kolko agree. A Trulia survey shows that millennials still want to buy houses: 78% say home ownership is part of their personal American Dream, up from 65% in 2011.
But they point to the same barriers, with tough access to credit and a weak job and wage market for young workers topping the list. Household formation, Meyer notes, is the usual driver of housing demand, and it's still only about 500,000 households a year, less than half its pre-recession level. And credit is tight enough that the average rejected borrower has had a credit score of nearly 700 through most of the year, according to mortgage-automation vendor Ellie Mae.
The question is whether those indicators will turn more positive in 2015, or take until 2016. At IHS Global Insight, economist Stephanie Karol is bullish on housing. She points to improvement in the labor markets this year -- not just the lower unemployment rate, but signs of spring on wages in the second half of 2014 and new unemployment-insurance claims running 13% lower than this time last year -- as evidence potential buyers are getting more confident. At the same time, supply-side problems like builders' access to financing and a shortage of buildable lots are clearing up, she says.
"If people feel confident they won't lose their job they feel better about moving out" of their parents' home or their rental, Karol said. She sees single-family housing starts rising 19% next year.
She may be right. The Ellie Mae survey of rejected loans shows a marked decline in the credit scores of ill-fated borrowers in recent months, with the average credit score of denied applicants falling 20 points this year. Banks are getting back to funding prime borrowers and rejecting just people who either have too much credit-card debt or don't pay their bills reliably.
The rough middle of the forecasts is for housing starts to go up about 15% this year -- enough to add about 300,000 jobs. Like so much else about the economy, how much better it gets next year depends a lot on wage growth. And wage growth will also decide just how good the New Year is to builders like D.R. Horton (DHI) , Pulte (PHM) and Toll Bros. (TOL) .
Homebuilding stocks are cyclical and volatile. Exchange-traded funds like the iShares Home Construction ETF (ITB) and the SPDR Homebuilders ETF (XHB) have trailed the market the last two years, but beaten it handily over five years. Whether they can get back to outperforming the S&P 500 depends most of all on whether workers who increasingly feel secure begin to also feel rich.
TheStreet Ratings team rates D R HORTON INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate D R HORTON INC (DHI) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, attractive valuation levels, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."
You can view the full analysis from the report here: DHI Ratings Report