4 Reasons to Stay Invested in U.S. Housing

The stock market’s wild ride over the last couple of months may have introduced a measure of uncertainty into the investment outlook for some sectors of the global economy. However, U.S. housing was not one of them. America’s housing market is continuing to grow faster than the economy overall. We are seeing a number of opportunities and remain constructive on the sector. Here are 4 reasons why the U.S. housing market is a good investment:

1. Strong job growth and consumer confidence: The U.S. economy has added roughly 3 million private sector jobs over the past year. This includes more than 750,000 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 2.4% in the past two years to reach 5.1%. 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.

2. Low inventories and rising pent-up demand: Both the absolute level of inventory of new and existing homes (now 2.5 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 Figure 1).    

3. Willingness to lend and expanding 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 rose 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 35-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.

4. Relative affordability: At this juncture, owning a house is incredibly cheap – both from a historical affordability perspective and relative to the cost of renting (see Figure 2). Although some have expressed concerns rising rates will reduce affordability, keep in mind that it would take a two percentage point rise in mortgage rates to go back to the long-term average. A very modest pickup in mortgage rates, which are currently under 4%, can be handled by an economy adding 3 million jobs in the private sector alone, in our view.