Total time: 7:53
Jessica McHugh: Today we're going to discuss the state of the U.S. housing market, where we are in the cycle, and our outlook going forward. I'm Jessica McHugh and today I have with me Dustin Qualley, who is a portfolio manager on our fixed income team. Dustin, as we approached 10 years of recovery in this economic expansion, many homeowners and potential buyers have seen home prices continue to push higher. Where are prices today? Do you expect a significant pullback in home prices soon?
Dustin: Hey, Jessica. Thank you for having me. Home prices hit their bottom in 2011 and have since steadily appreciated. During the earliest years of the recovery, you saw property price appreciation anywhere from 10% to 12% varying on the markets – we’re talking on an annual basis here. In more recent years, though, that property price appreciation has slowed to more of a 4%, or 5%, 6% year over year growth rate depending on the market. To answer your question about do we expect to see a pullback on property prices here in the immediate term? No, we do not. 2019, 2020 we expect property prices to continue to appreciate, albeit at a slower pace, maybe in the 4% range on a year over year basis. So what's driving this? Why are property prices, you know, appreciation coming down? I think it's driven by two things. One, you've got the Fed that's tightening policy, that's raising rates in the front end. That's pushing up mortgage rates. So affordability could be getting stretched a little bit as far as and how much home can people afford on a monthly basis. And then, two, you also have just the change in the tax law that happened that is going to impact, you know, the deductibility that homeowners are going to be able to take as well.
1:35
Jessica: Property price appreciation is great for people who are already own a home, but what about for first time homebuyers?
Dustin: So I would say yeah, affordability is getting stretched in many markets. The average monthly mortgage payment for first time homebuyers on a national basis is about $1,100. That's up over 15% in the past year and closer to 20%, 25% since the end of 2016. It is not only a function of rising property prices, the cost of borrow against housing has increased tremendously as well. As I already mentioned, mortgage rates are ticking up on national basis. Average mortgage rates on a 30-year conventional loan right now is about 4.85%. That's up 150 basis points since 2016. But the fact of the matter is, as affordability is getting stretched as payments are increasing, consumers are not experiencing a significant increase in wages. Average hourly earnings are up only 3.1% on a year over year basis, with property prices currently growing north of 5% a year. This can only go on for so long.
2:43
Jessica: Where are we today versus where we were at the start of the, you know, the last housing crisis, you know, 2005 to 2008. Would you say we're on the verge of another housing crisis?
Dustin: No, I definitely do not think we are on the verge of another housing crisis. At least not imminently. Borrowers are in a much better position today than they were pre-crisis. Just a couple stats to keep in mind: if you looked at the average credit score on Fannie Mae's conventional loans between 2005 and 2008, the years preceding the crisis, the average credit score was 696. This increased to 752 for the years between 2009 and 2015, and most recently sits around 747, 742. In addition to that, delinquency rates in the three years preceding the crisis were over 600 basis points. In 2017, they were closer to 22 basis points. So you're not seeing the delinquencies, and you're seeing better established borrowers from a credit perspective. Another thing to consider today versus pre-crisis is just the state of the consumer, where, as I mentioned, wage growth hasn't been off to the races. Household balance sheets are still strong. Household debt service as a percentage of income is near multi-decade lows. In addition, owner's equity in real estate as a percentage of household real estate is back to pre-crisis highs. So owners do have equity built into their houses. One more point I want to make on this -- consumers are saving more. After the personal savings rate bottom down in 2005 close to 2%, consumers are saving more and more and more of their income for future consumption. This is good. This helps them save for periods of crisis or credit crunches or anything like that. The personal savings rate is currently sitting around 6%.
4:34
Jessica: Okay. So what you're saying is the key takeaway is that, you know, despite a considerable increase in property prices post crisis, you expect this trend to continue because the consumer is in a better state than they were pre-crisis.
Dustin: Yes, albeit at a slower pace. As I mentioned, we have a resilient job market, coupled with a modest pickup and wages; consumer balance sheets are strong. If you look at household debt to GDP, we're currently sitting at 80%. That's down from 99% in 2008. But one thing to keep in mind is just how important the housing market is to the U.S. economy. Currently housing investment accounts for 15% of our GDP. This number includes both residential investment, meaning construction and remodeling, but also includes imputed rents and utilities payments. In addition, housing is a large component of both CPI and CPC, which are two inflation measures that investors very closely watch with these things in consideration. And given how long this recovery has been, investors are beginning to worry that when the housing market does slow down, how much of an impact will that have on inflation? How much of an impact is it going to have on growth numbers? And if it occurs sooner than later, and inflation data begins come in a little bit softer -- How's this going to influence Fed policy? What's this going to do for the rate picture? And what is this going to do for the overall recovery.
5:55
Jessica: You know where we are today, how do fixed income investors position for this? For these potential scenarios?
Dustin: Sure, I guess, you know, the scenario I'm laying out here is one where the housing market more or less, cools off rather than just abruptly turns the other direction. We expect the housing recovery to continue through 2020. Fixed income investors need to keep in mind that rising interest rates negatively impact property prices. With the Fed continuing to tighten policy, maybe another two to three hikes coming over the next 12 to 18 months, borrowing costs will increase and affordability will continue to be stretched. As fixed income investors here at Sage, we continue to like agency pass-throughs, more or less off of conventional 30-year mortgages, as well as some jumbo prime mortgages. In addition, given the strong state of the consumer and low delinquency levels across different consumer-oriented debt instruments, allocations to different types of asset-backed securities are attractive as well.
Disclosures: Sage Advisory Services is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This podcast is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.
