Goldilocks levels for US home inventories
After bottoming out at 63.4 per cent in summer 2015, the US home ownership rate has been gradually increasing. January and February of this year saw the Case-Schiller home price index flatten, indicating that there was neither an excess nor shortage of homes for sale – the market has reached Goldilocks levels.
GAM’s Tom Mansley states: “The US housing market continues to operate at a healthy pace. Construction of new single-family homes is gradually increasing from the multi-decade lows of recent years and multi-family housing levels have adjusted to meet the increased demand for rental properties.”
This sustained improvement mirrors the state of the US labour market. Participation rates, which measure the active portion of the economy, edged up to 63.0 per cent in March, according to US Bureau of Labor Statistics data. While this level is still below average, the trend is certainly moving in the right direction.
Stability in house prices, low mortgage rates and modestly increasing incomes have made home ownership substantially more attractive than the long-term average, summarises Gary Singleterry, GAM. This is evidenced by the rise in the Housing Affordability index, as reported by the National Association of Realtors. Conversely, the non-agency MBS market continues to shrink. “Although we foresee increased new issuance in 2016, we do not expect it to compensate for the reduction in currently outstanding non-agency MBS – those bonds issued by private entities such as banks, which typically offer higher yields but come with greater default risk. We are still constructive on the US residential MBS market, as the housing credit fundamentals are strong. The recent credit spread widening has resulted in higher expected spreads on new investments than we have seen in over two years.”
GAM’s Gary Singleterry adds: “We believe that mortgage credit risk is still relatively attractive, and with the recent widening of credit spreads everywhere, we see even better investment opportunities in the US MBS and ABS markets. Due to the recent widening of credit spreads in commercial MBS, we have increased our exposure to multi-family and small balance commercial MBS.