Now is the time to invest in the housing market, but you must be selective.

As my colleague Ian Floyd recently noted, the collapse in oil prices will bring renewed pressure to homebuilders, especially those in oil-rich states such as Texas. That state had been one of the few bright spots on the housing landscape. Not anymore.

In the upcoming earnings season, Texas-focused homebuilders will likely give a very cautious view, and analysts are already anticipating the headwinds. Case in point: JMP Securities recently downgraded Forestar Group, Inc. (NYSE: FOR) from outperform to market perform, thanks to the company’s considerable exposure to Texan real estate. 

Ian cites D.R. Horton, Inc. (NYSE: DHI), Pulte Group, Inc. (NYSE: PHM) and Lennar Corp. (NYSE: LEN), the state’s number one, four and five largest homebuilders, respectively, as companies to avoid at current oil prices and to watch closely as earnings season kicks into high gear.

But the drop in oil prices can be seen in an entirely different light. Consumers are now reaping a major windfall from lower energy prices and for homebuilders with exposure to other parts of the country, the stars may be aligning for a robust rebound. In fact, a few other factors point to a long-awaited housing market renaissance, outside of the oil-focused states.

Catalysts Galore
To be sure, the housing market remains in a funk. Housing starts averaged 1.5 million in the late 1990s and early 2000s, soaring to 2.2 million by 2007. That figure plunged sharply after the 2008 recession and still remains well below pre-recession peaks.

Yet there are several reasons to expect that figure will keep climbing in the next few years.

Let’s start with the smallest catalysts and work up from there.

First, FNMA and other government-backed housing lenders are starting to loosen the rules regarding the size of down payments needed for mortgages, while mortgage insurance premium fees are also being lowered.

Second, and more significant, mortgage are again at stunningly low interest rates, thanks to the bond market rally. The current 30-year mortgage is now 3.8%, down from 4.1% in November 2014. For a bit of context, mortgage rates averaged 12.7% in the 1980s and 8.1% in the 1990s. Baby boomers surely remember that and look on with envy at today’s first-time homebuyers.

Speaking of baby boomers, they are about to be eclipsed in by the millennials, whose numbers now approach 75 million. The vast majority of these millennials have been frozen out of the real estate market, for reasons enumerated in great detail over the past few years in many publications.

But it’s silly to suggest that millennials prefer renting to owning. One study, conducted by Merrill Lynch, found that 70% of millennials would like to eventually own their own home. These younger buyers just need more job stability — and higher incomes.

That process may already be underway. The steady drop in unemployment is leading many to lose their fear that it is too risky to take the homeowner plunge. Jobs are increasingly plentiful, even for the newly laid off. In fact, 94% off all people aged 25-to-34 are currently employed — the highest level since December 2008. More importantly, the tight job market is expected to lead to steadily higher wages over the course of 2015 and 2016.

Both of these factors should have a beneficial effect on housing, according to analysts at Merrill Lynch. “While this housing recovery certainly hasn’t unfolded as many investors had expected, we believe that we are in the early stages of a prolonged upcycle.” Merrill’s housing economist, Michelle Meyer, sees housing starts rising roughly 10% in 2015, to around 1.167 million homes. She expects that figure to keep rising in 2016 and 2017, before peaking in 2018 at 1.5 million.

The notion of expanding employment and rising wages was the dominant theme at the just-completed International Builders Show. David Crowe, a spokesman for the U.S. homebuilders association predicted a 26% spike in single family housing starts. “The overall economy is doing better than it was a year ago,” said Crowe to the Wall Street Journal. Economists at Freddie Mac anticipate a 15% jump in single family housing starts, which would still be an impressive growth rate.

Top picks
MDC Holdings, Inc. (NYSE: MDC) remains the clear value play in the housing sector. Shares trade for slightly below tangible book value, sport a 4% dividend yield and are valued at around 13 times projected 2015 profits, which are likely to be roughly 25% above 2014 levels. The strong balance sheet is being put to work as MDC is steadily acquiring new land in fast-growing regions. MDC has major exposure to California, Colorado, Arizona and Nevada — and zero exposure to Texas or other oil states such as Louisiana.

Beazer Homes USA, Inc. (NYSE: BZH) also derives more than 90% of revenue outside of Texas. The builder focuses on first-time buyers as well as down-sizing retirement oriented buyers. That first niche is a pure play on the millennials theme noted earlier. Shares have pulled back in recent weeks on news that near-term expenses have gotten ahead of revenues, but by next year, the company anticipates 10% net margins on a $2 million revenue base, which should translate into earnings per share of around $2.25, up from an operating loss in fiscal (September) 2014. Shares trade for less than eight times that fiscal 2016 outlook.

Risks To Consider: A rise in interest rates, or the unemployment rate, could derail the housing recovery, though neither of those factors appear to be big risks for 2015.

Action To Take –> It seems as if the housing recovery has repeatedly failed to take root, but it is in fact slowly getting stronger. The factors noted above could accelerate that rebound in 2015 and 2016. Considering sector share prices have fallen far from the 52-week high, this is a good time to re-visit the housing sector.

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