Investment Commentary – September 2014

Equity Markets Under Housing Arrest

If you follow the financial press or watch any business television programming you will have gathered a sense that the housing situation [in the US in particular] is both very important and closely watched. Why? And, why do equity market prospects seem to hinge upon these metrics to such a significant extent?

First of all, let’s look at the main data points by which the health of the US housing market is typically gauged: housing starts and existing home sales. See right margin.

Housing starts include both single and multi-family residences, the latter tending to be quite volatile. Consequently, many believe single-family numbers provide a better read on the health of the housing recovery. There is no denying that the situation is vastly improved versus its nadir back in 2009; however, there is growing concern over the more recent pace of advances [or lack thereof] in housing data. In fact, sales of both new and existing homes came in about 5% lower in the first half of 2014 versus last year. And, the overall rate of home ownership has declined to 65% from 69% back in 2005. Interestingly, multi-family stats still show a clear long-term upward trend and the single-family data point showed this segment was essentially flat in August. It should also be borne out that these data points are subject to revision and must be continuously reevaluated to get an accurate read on the state of the underlying economy and what the future might hold for equity markets.

The US housing industry employs millions of people, so an ongoing recovery benefits the economy. Construction jobs accounted for nearly 15% of employment growth in the US over the past several months. It is anticipated that the newly employed will increase their discretionary spending, thereby improving economic growth, with consumption accounting for two-thirds of US GDP. This should enhance consumer sentiment and in turn prosperity…namely in the form of equity market advances.

Of late there’s been a lot of talk about the elevated proportion of renters versus homeowners. One of the key considerations with regards to this metric is that first time homebuyers account for a considerable share of sales as they transition from renters to owners, with that representation in the range of 30-50% historically. Lending has become far more challenging, which seems to account for many people opting to continue renting or acknowledging that the option to buy is not available to them…at least not right now. A recent study by the New York Fed (February 2014) cited insufficient savings/too much debt, limited income and weak credit scores as the main obstacles to purchasing a home during the course of the next 1-3 years. Limited access to credit will curtail the potential uptick in housing, but there will still be demand from those who do qualify for a mortgage.

Many opine that the lengthy bull market in housing has been engineered by the Federal Reserve and that eventual monetary tightening will bring about another bust. However, many are confident that housing demand can continue to slowly build…as long as the economy is moving in the right direction.

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