The housing sector, hit incredibly hard during the Great Recession, has come a long way since those dark days. While the S&P/Case Shiller U.S. National Home Price plummeted by -18.5% from end of 2005 to December 2009, the index has since bounced back by +19.8% as of November 2015. Real investments in housing have gained steam on the supply side and upward moving prices reflect growing demand.
This time around, fortunately, the growth looks less like a bubble and more promising with supporting macro fundamentals.
After 2011, the sector gathered momentum not only in the construction of new homes, but in demand as well. This corresponds to a rise in GDP growth from +1.6% in 2011 to +2.4% in 2014. Additionally, the Value of Construction Put in Place Survey (VIP) from the U.S. Census Bureau has recorded solidly positive year-over-year gains for all months in 2015 ending the year with + 8.1% growth in December
Demand for homes has surged due to the strenghtening job market and low mortgage rates. Since 2011, the number of employees has grown by more than 2 million each year. Mortgage interest rates have also been trending favorably – 30-year mortgages averaged close to 4% around end of2011 and were down to about 3.6% as of early March.
Favorable Mortgage Terms Encourage Home Ownership
Residential fixed investments have grown substantially, by +9.4% and + 9% respectively in the last two quarters of 2015 year-over-year, with the segment’s contribution to real GDP growth being 0.3% in 2015, up from 0.1% of 2014.
Along with strong job market conditions for the overall U.S. economy, the construction industry itself has added significantly to its labor force. Residential construction contributed approximately 62% of jobs created by the building construction sector this January.
Home Loan Defaults Are Also Down
The S&P/Experian First Mortgage Default Index shows a decline in default rate from 2.19% in December 2011 to 0.84% in December 2015. This reflects not only a stronger consumer but also a general move towards more responsible lending.
Bottom Line for Investors
The housing market looks poised to gain both in prices and sales. Despite U.S. credit tightening, strengthening employment and wage growth could result in solid gains for the housing industry.Also, with the reduction of the minimum down payment requirements on conventional mortgages from 5% to 3% by Fannie Mae and Freddie Mac, sentiment is expected to improve further.Assuming the U.S. grows modestly this year – which we think it will – housing should climb alongside it.
Disclosure