U.S. homebuilders are an attractive investment as the housing market starts a “strong” recovery that may drive a surge in new-home sales, Goldman Sachs Group Inc. (GS) said in a report today.

Housing has a “long list of positives,” including rising prices, job growth, supportive government policies and a decline in the so-called shadow inventory of homes, Goldman Sachs analysts Joshua Pollard and Anto Savarirajan wrote in a note to clients. They raised their rating on the homebuilding industry to attractive from neutral.

Public homebuilders, which have been taking market share from closely held companies, reported increasing orders this year as mortgage rates fell to record lows and the supply of existing homes for sale shrank. Construction of single-family houses rose 4.7 percent in June to a 539,000 annual rate, the fastest in two years, the Commerce Department said last week.

“The super cyclical housing market has turned and a strong recovery in new-home sales is ahead,” the Goldman Sachs analysts wrote. “Over the last year a number of risks to the housing market have abated, giving us confidence that rising home prices will drive a 3-7 year up-cycle in the U.S. market.”

Pollard and Savarirajan added MDC Holdings Inc. (MDC) to its conviction buy list, raised KB Home (KBH) to buy from neutral, increased Ryland Group Inc. (RYL) to neutral from sell and lowered NVR Inc. (NVR) to sell from neutral. They maintained buy ratings on Toll Brothers Inc. (TOL) and PulteGroup Inc. (PHM)

Stocks Gain

MDC Holdings jumped 5.7 percent, the most since February, to $33.18 in New York trading. KB Home climbed 3.6 percent to $10.16, while Ryland added 3.5 percent to $26.64.

The 13-member Bloomberg Industries homebuilder index reversed earlier losses and increased 1.1 percent. The measure has rallied 55 percent this year, compared with a 7.4 percent gain in the Standard & Poor’s 500 Index.

The U.S. economy has created enough jobs since the end of the recession in 2009 to fuel new-home sales at an annual rate of 550,000 to 600,000, the analysts said. New houses sold at a pace of 369,000 in May, the highest rate since 2010, the Commerce Department reported last month.

The Goldman Sachs analysts estimated new-home sales would reach 700,000 in 2014.

U.S. Policies

Government policies have improved in the past year by addressing supply instead of demand, the analysts wrote. Recent programs include the bulk sale of foreclosed single-family homes to investors who are converting them to rentals, and the expanded Home Affordable Refinance Program, which allows refinancing of properties worth less than their mortgages.

Investors “have yet to grasp the significant decline in shadow inventory,” as the supply of homes for sale has fallen to six months from 10 months in the past two years, Pollard and Savarirajan wrote. Shadow inventory, or the homes projected to hit the market through foreclosures and short sales, is down 15 percent in Arizona, California, Florida, Nevada and Texas, while growth in building permits indicates a 34 percent increase in demand in those states, they said.

“Investors are quickly swallowing new foreclosure supply, limiting shadow inventory and creating a floor for home prices,” Pollard and Savarirajan wrote. “We expect any further decline in inventory to serve as a platform for price appreciation, further aiding sales.”