U.S. Housing – A Positive Signal Amidst The Noise by Marie M. Schofield, CFA, ColumbiaManagement
- While there has been a broad slowing in the last 15 months, the U.S. housing market has stabilized and started to recover.
- Homebuilders are catering to upscale buyers where financing is less of a constraint, and also building larger and more expensive homes.
- Housing has started to add to economic activity after stalling for the last few quarters, but the gain in traction will prove slow and sensitive to large shifts in interest rates.
There has been enormous volatility in the monthly readings on housing data generally. With the swings hugely positive one month then depressingly negative the next, it has been difficult to decipher underlying trends based on the headlines. Shifting weather bears part of the responsibility, but we can also point to poor seasonal adjustments which have failed to smooth out the month-to-month wiggles. For instance, the best news of the week was the 18% gain in August new home sales to 504,000 (SAAR), the highest pace in six years. However, the Census Bureau has indicated a +/- 16% confidence interval on the monthly changes. So the data is very suspect, particularly with August housing starts down 13% and existing home sales down 2%. It is with this in mind that we need to assess trends through the lens of three-month moving averages and not versus the prior month alone. On this basis, housing activity appears quite stable.
Some themes do emerge though. While there has been a broad slowing in the last 15 months, recently the data has stabilized and has started to recover. Multi-family demand remains high, as tighter credit standards are pushing many younger households toward renting vs. owning, and retiring baby boomers seek to downsize. With rental demand high and rental vacancy rates low (a 20 year low) rental costs are rising fast, although they currently appear at breakeven with monthly mortgage costs. The home re-sale market in particular is facing unique challenges. Investor demand has shrunk as distressed inventories have thinned. The share of distressed sales fell to only 8% in August, down from 12% a year ago and 31% three years ago. The investor share of existing home sales fell to 12%, the lowest on record. As a result, the diminished demand and pool of investors has handed off to a diminished pool of entry level and first-time buyers. Entry-level buyers are hurt by reduced affordability due to higher prices and rates, tighter credit/regulation, weak income growth, and heavier student debt. Weak household formation and falling rates of homeownership for younger age cohorts accentuate the problem. The re-sale market has yet to recover lost ground, but recent trends are encouraging for the outlook.
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New home construction and sales appear to have seen less interruption from the jump in rates last year. Homebuilders can offer preferred financing and many incentives that have helped maintain demand in an effort to align their activity and inventory to a buyer pool with stronger fundamentals. As a result, they are catering to upscale buyers where financing is less of a constraint, and also building larger and more expensive homes. Indeed the average square footage of newly build homes surpasses that seen during the housing boom with an increasing number built on spec. The share of less expensive new homes sold (under $200,000) has fallen to 25% from over 40% in 2010; in contrast, the share of more expensive homes (over $400,000) has risen to 28% from 13% in 2010.
Overall, housing is regaining its footing and rebalancing to the shifting fundamentals, but progress has been uneven as the market confronts various challenges. It will take time to rebalance to a new equilibrium, particularly in the re-sale market, although new home construction appears to be recovering and adjusting more quickly. Housing has already started to add to economic activity after stalling for the last few quarters, but the gain in traction will prove slow and sensitive to large shifts in rates.