We remain constructive on the U.S. housing market, which is likely to continue to grow faster than the overall economy, and we see attractive opportunities in this sector. Here are three reasons to stay invested in U.S. housing:
- Strong job growth and consumer confidence: The U.S. economy has added 2.9 million private sector jobs over the past year. This includes 736,000 new jobs in the 25- to 34-year-old cohort, an important segment for first-time buyers, a rate that is near a 15-year high. A pickup in wage growth is likely given the improvement in the labor market; the unemployment rate declined by 2.2% in the past two years to reach 5.3%. We expect more jobs and higher incomes will lead to rising consumer confidence and demand for homes, even in the face of modestly higher mortgage rates.
- Low inventories and rising pent-up demand: Both the absolute level of inventory of new and existing homes (now 2.3 million units total) and inventory as a percentage of households (now 1.6%) are at or near 15-year lows. Over the past year, 1.5 million new households have formed; that compares with less than 1.2 million new housing units. In addition, over 30% of 18- to 34-year-olds are living at home. What does this mean? A lot of pent-up demand, and if it picks up, as we expect, housing starts will likely rise toward 1.5 million units (or higher) in the next two to three years. Simply put, with residential investment spending at 3.3% of GDP, the U.S. has been significantly under-building relative to long-term demand (the 55-year average is 4.5% of GDP – see chart).
- Willingness to lend and rising demand for credit: Banks are finally lending again! In reviewing second quarter 2015 earnings details, we noticed that mortgage origination growth at all four of the largest U.S. banks is up by double digits. At the same time banks are increasing their willingness to lend, households are becoming more confident and many are now in a position to re-lever: Consumer debt service ratios are near 25-year lows. Importantly, a significant number of previously foreclosed homeowners could become eligible to buy a home over the next five years. As such, the demand and supply of credit is likely to pick up, which should support the U.S. housing market.
Investors seeking to capitalize on these trends should stay overweight U.S. housing and housing-related sectors. We continue to see value in select companies in areas such as building materials, home improvement, title insurance, homebuilding, banks and specialty finance companies as well as in non-agency mortgage-backed securities (MBS).