Wednesday, April 01, 2015
It has been six years since the financial crisis imperiled the U.S. housing market. While the U.S. stock market and the economy have reached new highs, demand for new homes is still down almost 30% from the long-run average. We think it is just a matter of time until that deficit is completely erased.
Vancouverites live in one of the hottest real estate markets in the world, so it may be hard to believe that almost 17% of all American homeowners still owe more than their houses are worth. These homeowners are essentially trapped until they pay down their mortgage or the value of their home increases. Importantly, the situation is much better today than it was three short years ago, when over 30% of all homeowners were coping with negative equity. We expect continued improvement as debts are repaid and prices trend higher.
First-time homebuyers have been noticeably absent from the U.S. housing recovery. We think this is largely because the Millennial generation is living at home longer and starting families later in life. The proportion of adult Millennials (age 18 - 35) still living with their parents has increased to 35%, up from 25% a decade ago. The reality facing many first-time homebuyers is that it is tough to save for a meaningful down payment and qualify for a mortgage. Real wages have generally declined for Millennials and more of them have student loans to pay off. Although, over time, student debts will be repaid and salaries will increase with career advancement.
Meanwhile, renting has become more popular, especially for young people, given lower upfront costs and more flexible living arrangements. The problem is that there is now a shortage of rental properties in many areas. U.S. rental vacancies are just 7% nationwide, a level not seen since the early 1990’s. In comparison, homeownership costs have fallen thanks to near record-low mortgage rates. We think renters will likely weigh their options the next time a landlord increases their rent and many will decide that buying a home is a better value proposition.
We believe there are also advantages to homeownership that go beyond financial imperatives. Being able to customize your home and settle into a permanent location to raise your family are attractive attributes for many people. Others may appreciate the security of having a place to live, payment-free, in retirement. In short, we believe the American dream of owning that perfect home is alive and well.
In our view, a slower than anticipated recovery has created an opportunity to buy high quality housing stocks at a good price. Moreover, we remain optimistic about the combination of rising home equity, pent-up demand from aging Millennials, and a shortage of affordable rentals to help keep the housing recovery on track for years to come.