April housing data a tailwind for economic activity

Earlier this week, total housing starts for April came in at 1.13 million on a seasonally adjusted annual rate, representing a 9.2% increase from April 2014 (data: U.S. Census Bureau; U.S. Department of Housing and Urban Development). While housing-starts data are volatile and subject to revision, we believe that housing is on a slow path to recovery and these data support that belief.

Since bottoming in 2009, housing starts have gradually improved each year, and we think that the trend will continue further into 2015. The critical spring selling season for homebuilders seems to have gone fairly well and demand for new homes continues to increase. While housing demand has increased each of the last five years, we still have a long runway to reach the pre-recession 20-year average of roughly 1.5 million housing starts per year (data: U.S. Census Bureau).

As a result, we feel that housing demand will continue to serve as a tailwind for economic activity. While mortgage availability remains tight and demand from first-time buyers remains somewhat depressed (likely partially due to increased student loan debt), the strengthening employment outlook, generally improving consumer confidence, and increasing household formation should continue to support the moderate recovery in housing starts. Increases in interest rates would create a headwind to housing demand; however, we expect any fed funds rate increases to be very gradual and unlikely to derail the recovery in the near term.

The views expressed represent the Manager’s assessment of the market environment as of May 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 future assessments may not reflect the Manager's current views.

Investing involves risk, including the possible loss of principal.

Past performance does not guarantee future results.

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