JPMorgan sees demand, price increases in housing market

(Reuters) - The housing market is set to improve over at least the next 18 months as demand increases and low supply pushes up home prices, J.P. Morgan Securities said, upgrading stocks of three homebuilders.

The brokerage upgraded PulteGroup Inc (PHM.N), K.B. Home (KBH.N) and Beazer Homes (BZH.N), saying investors should buy homebuilders' stocks more aggressively on pullbacks despite their strong gains this year.

The Standard & Poor's homebuilder index .GSPHOME has risen nearly 60 percent in 2012.

"While household formation, the core demand driver of housing starts, has begun to improve in 2012, greater gains still lie ahead," JP Morgan analyst Michael Rehaut said.

An incremental tightening of supply in 2012 should act as a solid protection against downside risk in the housing market, particularly in terms of home prices, in the event that demand slows or the macroeconomy falters near term, he added.

Rehaut downgraded Toll Brothers Inc (TOL.N) on valuation.

The homebuilder index was up 2 percent on Thursday morning. Shares of PulteGroup touched a more than 2-year high at $12.63. Shares of KB Home and Beazer Homes were up 5 percent on Thursday morning on the New York Stock Exchange.

(Reporting by A. Ananthalakshmi in Bangalore)