Weekly Investment Commentary: Neither bubble nor bottom for U.S. housing market
Bottom line up top
- Creaks, but not cracks, in the foundation. Despite a recent raft of wobbly U.S. housing data, we foresee a relatively stable housing market in the near term. True, conditions haven’t yet returned to normal. Deteriorating homebuilder and consumer sentiment, higher mortgage rates, historically low affordability, declines in housing starts and building permits, and record-low inventories of existing homes for sale, among other factors — all have significant implications for the housing sector, and thus the broader economy. But in our view they’re not evidence of a housing bubble that’s due to burst. Consumer pessimism aside, demand for homes is still healthy. Further, mortgage rates have moderated since the spring and lending standards remain rigorous. And those glum homebuilders? Confidence may be down sharply this year, but has nonetheless remained above its long-term average (Figure 1).
- But plenty of pain remains, especially for renters. Traditionally, those priced out of single-family homeownership have turned to the rental market, where houses, apartments and other multi-family dwellings have offered more affordable options. But supply constraints, demographic trends favoring renting over owning, and efforts by some landlords to recoup pandemic-related losses have sent the national median rent soaring to $2,000 per month for the first time ever, according to Redfin. The severity of rent inflation varies by region, based on CPI shelter data (Figure 2). Underscoring the supply squeeze are anecdotal reports that bidding wars are now common in the rental market amid the persistent shortage of units. We expect these market conditions to continue for some time.
"Another way to stay defensive is to shift some equity risk to strategies that still offer upside return but with decidedly less downside risk."
What are the portfolio implications?
Real estate investors should be well positioned, especially if their sector and regional exposures are aligned with prevailing demographic and supply/ demand trends. Builders are still playing catch-up from the global financial crisis, with housing starts still above trend. This reinforces longer-term price stability in the sector and supports our constructive outlook.
At the same time, U.S. consumers are feeling the squeeze of higher home prices and rental costs, causing them to curb their spending on other goods and services. A recent Bank of America report, for example, showed a decline in credit card purchases. Consumers who spend less will eventually take a toll on corporate earnings. That, along with continued broad economic uncertainty, suggests that market volatility will persist.
Our takeaway: remain defensive There are a number of ways to do this, but the largest source of portfolio volatility is equities. As we’ve been saying for some time now, we like dividend growth stocks. They’re generally higher quality and derive more of their total return from dividends than from price appreciation.
Another way to stay defensive is to shift some equity risk to strategies that still offer upside return but with decidedly less downside risk. Private real estate falls into this category, having delivered consistent returns over time (including in 2022) while typically avoiding extreme return scenarios (up or down) compared to other asset classes. Figure 3 shows the distribution of returns across REITs, U.S. equities and private real estate.
"Real estate investors should be well positioned, especially if their sector and regional exposures are aligned with prevailing demographic and supply/demand trends."
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Regular meetings of the GIC lead to published outlooks that offer:
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- guidance on how to turn our insights into action via regular commentary and communications
Endnotes
Sources
All market and economic data from Bloomberg, FactSet and Morningstar.
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