Housing recovery in closer view
August 24, 2015
More than six years into the current economic expansion, most sectors of the economy have seen pronounced recoveries. However, one area that has not seen demand rebound to pre-crisis levels is the housing market. While there are a number of well-documented reasons for the absent recovery, we believe housing indicators are finally pointing in the right direction, which should bode well for the housing market over time.
Sales of new homes seem poised to increase
Since peaking at close to 1.3 million new single-family home sales in 2005 (see Chart 1), housing sales have yet to meaningfully recover from the trough that was reached in 2011 (data: U.S. Census Bureau). In fact, at only 437,000, single-family new home sales in 2014 are only modestly above the 306,000 figure posted in 2011 and still well below the historical average of more than 650,000 homes.
Many factors have played a part in the anemic housing recovery, including a decreased rate of household formation, lack of mortgage availability, increased student loan debt, and a weak job market for millennials, some of whom have begun to reach traditional home-buying age. Fortunately, many of these headwinds are showing signs of easing, which may lead to increased demand for homes in the future.
Chart 1. Sales of new single-family homes
Data: U.S. Census Bureau
Household creation gaining steam
Between 1965 and 2007, the annual number of new households created in the United States has averaged 1.3 million. Since the 2008 recession, the average has been much lower, at about 630,000. However, we have recently seen an uptick in household formation data, with the last two quarters at levels well above 1 million. This means that more individuals are moving out on their own and buying or renting places to live.
Young adults are among the biggest drivers of household formation, particularly when they leave their parents’ homes and establish their own independent households — whether as renters or owners. The post-bubble trend has been toward renting, which has led rental rates to increase at a robust pace. However, we have begun to see some homebuilders cater their housing supply toward the entry-level segment where they believe they can be competitive with apartment rents. Eventually, we anticipate that increased rental rates and increased entry-level home supply will spur more owner-occupied household formation.
We have already seen homeownership levels decline dramatically since the housing bubble. After peaking at close to 70% in the mid-2000s, the homeownership rate is now 63.4%, which is lower than the long-term average of 65.3% (see Chart 2). While homeownership rates may continue to overshoot the average on the downside, we believe that the bulk of the air has been taken out of the inflated ownership levels that we saw during the housing bubble period.
Chart 2. Homeownership: Prepared to normalize?
Data: U.S. Census Bureau. Quarterly observations.
Mortgages are slightly easier to obtain
Mortgage availability remains fairly tight, but it has shown some signs of loosening. The Mortgage Bankers Association’s Mortgage Credit Availability Index improved to 122 in June 2015 (from a baseline of 100 in March 2012). That said, one notable obstacle to mortgage issuance is in play, in the form of student loan debt. Since 2004, outstanding student loan debt has swollen from slightly more than $300 billion to more than $1 trillion (data: U.S. Federal Reserve).
This has created challenges for potential home buyers who may be precluded from receiving mortgages due to heavy student loan obligations. While it is not easy to see what will change the trajectory of student loan balances, we believe that an improving employment market, together with easing lending standards, will mitigate some of the headwinds related to student debt.
Positive indications from employment and first-time buyers
While improvements in the overall U.S. unemployment rate get a lot of attention, we are seeing positive signs in the key 25-to-34-year-old demographic. The unemployment rate for this age group declined from 6.5% in June 2014 to 5.6% in June 2015 (data: Bureau of Labor Statistics). While there still may be a trend toward underemployment in this demographic, healthier employment levels and wage growth may build this cohort's confidence in taking the plunge toward homeownership.
We have seen evidence that the first-time buyer is coming back to the market, perhaps spurred by some of the aforementioned factors. According to the National Association of Realtors (NAR), the percentage of first-time buyers of existing homes has remained at or above 30% for four consecutive months, which is a positive trend not seen since 2012. These levels remain below the long-term average of 40%, but sales are moving in the right direction. An improving rate of first-time home buyers will be necessary to help housing sales and homeownership rates move back toward long-term averages.
Cautious optimism as we move ahead
The U.S. housing market is not without its share of complications, but we believe that on the whole it is becoming more constructive. As discussed above, relevant indicators are showing positive readings. Taken together, these factors could likely lend a measure of support to the housing markets in coming quarters.
As it relates to the overall economy, residential construction represents a relatively small yet important portion of gross domestic product (GDP). According to the U.S. Bureau of Economic Analysis, residential construction currently represents 3.1% of GDP, well below the longer-term average of roughly 4.3%. If housing demand continues to rebound as we expect, we believe construction levels will slowly make their way back toward their long-term averages, providing a tailwind to the U.S. economy and helping sustain today’s recovery.
At this writing, the Delaware Investments Small-Cap Value / Mid-Cap Value Equity team believes that shares of U.S. homebuilders are appropriately priced at this stage of the housing recovery. We continue to look diligently at investment opportunities in peripheral industries that may benefit from housing improvement, giving weight to fundamentals as well as valuations, balance sheet strength, and free-cash-flow characteristics.
The views expressed represent the Manager's assessment of the market environment as of August 2015, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's views.
Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting delawarefunds.com/literature or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.
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