Weekly Investment Commentary: Housing market still knocking on investors’ doors
Bottom line up top
- The housing market hasn’t worn out its welcome. A jump in home prices and a 1% upswing in mortgage rates have investors wondering if there’s still upside for housing. Adding to the cautionary tone is the disconnect between worsening homebuyer sentiment and unprecedented homebuilder optimism (Figure 1). While these trends may pose headwinds, they’re unlikely to blow the house down any time soon. On balance, housing looks to be a source of investment opportunity.
- Diminished supply remains a key sticking point. The supply of homes for sale in the U.S. has been falling over the last 15 years and hit an all-time low in January (Figure 2). We see a shortage of three to five million units across the U.S. due to factors such as overhang from the housing crisis and massive migration from larger coastal cities into the Sunbelt, where housing stock is scarce. Given extremely limited inventory, average home prices should continue to climb, albeit more slowly than last year’s nearly 20% rise.
- What does this mean for portfolios? A robust housing market speaks to overall economic health, and there are clear beneficiaries, such as real assets and municipal bonds. At the same time, we have a few words of caution for investors with exposure to mortgage-backed securities (MBS).
“The still-strong housing market should create ongoing sources of investment opportunity.”
Portfolio construction implications
Over the past few weeks, we’ve discussed interest rates, wage inflation and overall economic growth. Housing, which accounts for roughly 17% of U.S. GDP, sits squarely at the intersection of these major themes. With that in mind, we offer the following views about which asset classes may benefit most from a strong housing market, and what this means in the context of portfolio construction.
- Real estate: Significant exposure to real estate should help investors benefit from inflation and generate returns, despite rising rates and increased input costs. But selectivity is critical: In particular, we advocate striking a balance between geography (acquiring properties where demographics are shifting and demand outpaces supply) and property type (single and multifamily housing, but also properties that support the community ecosystem, such as senior living).
- Municipal bonds: Higher home prices are clearly a boon to municipalities, as they rely on property taxes to fund debt. This includes general obligation bonds issued by local governments and school districts, as well as land-secured bonds. Property tax collection is accelerating at historically high rates, solidifying the resilience of municipal credit.
- But we’re cautious toward mortgage-backed securities and core bond strategies with significant exposure to that sector: Even with elevated mortgage applications and the corresponding repackaging of loans into MBS, it’s difficult to contend with the Fed reducing its purchases of new MBS and allowing its balance sheet to shrink. Portfolios most susceptible to these risks include those with sizable allocations to MBS and high levels of rate sensitivity via weightings in core bonds and other sectors in the broad aggregate index.
“Higher home prices are clearly a boon to municipalities, as they rely on property taxes to fund debt.”
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Endnotes
Sources
All market data from Bloomberg, Morningstar and FactSet
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