US housing market regains lustre
Ongoing lack of supply of US housing has teed up a possible decade of gains for investors, but they need to beware the investment vehicles they use to access the asset class, according to comments from Smead Capital Management portfolio manager Cole Smead in the wake of market data from the US National Association of Realtors.
Sales of existing homes increased in January to the fastest pace in a decade, the NAR said. The data covers transactions including single-family homes, townhomes, condominiums and co-ops (as they are called in the US market). Sales of these types of properties increased 3.3% to a seasonally adjusted annual rate of 5.69 million sales.
The figures suggest that the monthly pace of sales is up 3.8% on the same month last year, and the annualised pace is the strongest since February 2007, when the rate was 5.79 million sales.
Lawrence Yun, NAR chief economist, said the data pointed to “resilience” among consumers despite a rising rate environment.
“Much of the country saw robust sales activity last month as strong hiring and improved consumer confidence at the end of last year appear to have sparked considerable interest in buying a home. Market challenges remain, but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions.”
However, a key challenge to home buyers remains and is getting worse: total housing inventory in January was 7.1% lower than a year ago – 1.69 million homes for sale versus 1.82 million. The year-on-year fall continued for a 20th month in a row. And the availability of housing could be further dampened across the US by growing sales of buy-to-let deals targeting single-family homes.
“Fannie Mae is supporting a Wall Street firm’s investment in single-family rentals,” noted NAR president William Brown, who added: “This will only further hamper tight supply and put major investors in direct competition with traditional buyers.”
First-time buyers were 33% of sales in January, the NAR data shows.
Reacting to the data, Cole Smead, co-portfolio manager on the Smead US Value Ucits fund, said: “The 20th month in a row of year-on-year declines in available inventory highlights the utter lack of supply present in the US housing market. We will have to build a large amount of homes to normalise the supply and demand dynamics the next 5-10 years. The game is on, but what investment vehicles will make money from this? This is what investors don’t understand.”
The fund’s second biggest holding as of the end of December was in NVR Inc., some 6% of the portfolio; the company operates as a housebuilder through brands such as Ryan Homes, NVHomes and Heartland Homes. It also operates mortgage services in markets where it is active in building properties. The company reported its fourth quarter 2016 net earnings were up 13% on the same period a year ago, while new orders were up 18% compared to the same quarter in 2015.
European investors may need to balance the current dynamics of the US residential property market against experiences stemming from the credit crunch and the global financial crisis in terms of assets such as residential mortgage backed securities (RMBS) or similar securities.
In 2013, certain academic studies were predicting significant losses associated with RMBS securitisation because of the troubles that had hit the US property market and the broader economy (http://www.investmenteurope.net/other/bill-to-banks-for-faulty-us-rmbs-could-hit-160bn/ ).
And earlier still, investors were noting that RMBS based on property assets outside the US were offering a different risk/reward opportunity at a time when all RMBS were arguably being tarnished with the same brush (http://www.investmenteurope.net/other/shift-in-focus-by-cheyne-capitals-listed-hedge-fund-reaps-rewards/ ).
However, more recently, arguments have been put forward for once again reconsidering US RMBS, particularly in light of the recent strengthening of the US housing market and the fundamentals driving it (http://www.investmenteurope.net/opinion/five-trades-powering-neuberger-bermans-gbar-fund/ ).