The importance to the U.S. economy of homebuilding cannot be overstated. Not only does the cost of home ownership account for a considerable portion of the typical consumer’s income, it is also responsible for the employment of millions of Americans. When you consider all the industries tied into homebuilding, from raw materials production (lumber, concrete, steel) and construction to home furnishings and mortgage lending, it’s easy to understand why this key industry sector is so widely followed by economists and investment managers.
Around this theme, we have been following closely the Home Ownership Rate and US Rental Housing Vacancy Rate (illustrated above) ever since the subprime financial crisis for signs that the recession in home building might be subsiding. The Home Ownership Rate simply measures the percentage of American households that own (versus rent) their primary domicile. The very long-term average home ownership rate has been around 65%. However, in the years preceding the subprime crisis, that rate climbed to almost 70%. Over the last 8 years, that bubble has unwound itself with the Home Ownership Rate now sitting slightly below the long-term average at 63% where it has been relatively stable for the last year or so.
Similarly, the Rental Housing Vacancy Rate has been falling over that same period indicating that the 5% or so of households that were trapped into the subprime crisis have moved back into the rental market. That rate, the Rental Housing Vacancy Rate, has also stabilized over the last year as well.
Therefore, we believe the US housing market has finally stabilized after a very long and painful correction. In fact, based on inflated prices for both new and existing homes, we share the common opinion that the U.S. is in the midst of a housing shortage and that the equilibrium for home ownership is more likely in the 65% range, versus its current reading at 63%. That shortage represents approximately 2,000,000 homes that need to be built to satisfy the pent-up demand for home ownership in this country.
Much of this demand is likely coming from otherwise first-time home buyers who have finally regained confidence in the economy, the job market, and the housing market to assume (and qualify for) a mortgage and purchase a home. Renewed demand along with still very low mortgage rates should provide a long period of renewed housing demand and subsequent home building.
Therefore, in recent months we have allocated more of our equity investments towards home building. The obvious additions were D.R. Horton, Inc., KB Home, and Taylor Morrison Home Corp, which are all home builders that target different customers and markets. In addition, we have held Home Depot, Inc. for many years and recently added Masco Corp, which manufactures and distributes everything from cabinets and flooring to faucets and sinks. As well, we have added to our Wells Fargo & Company position recently and added Citigroup Inc, largely because of their mortgage origination businesses.
Although we still believe that US Real GDP will be capped between 1.5% - 2.0% for the foreseeable future (see our 1st Quarter Markets & Economics Commentary for more detail), a renaissance in US home building, depending on its magnitude, could be an adequate economic force that might make us reconsider and revise that assumption upward.
For now, and until we see some progress on this front or on the legislative front towards passing growth inducing legislation, whether it be corporate tax cuts, deregulation, or infrastructure spending, we are going to fall back on our baseline growth estimate, that being US Real GDP capped at 2.0%.
With aggregate growth in US Real GDP stuck at 1.5% - 2.0%, we will continue our more active strategy of taking profits where individual issues appear over-bought and rolling into issues that appear over-sold. In such an environment for growth, holding on to over-bought securities awaiting underlying valuations to catch up usually necessitates intolerably long periods of underperformance in those specific issues.
As always, please feel free to contact us if you have any questions or if you need to schedule an appointment to discuss your account or financial plan with us. This is particularly important if you have experienced a big change in your life recently (got married, retired, changed employment, bought/sold a business, etc.).
2016 Form ADV Notice and Offering – the firm’s 2016 amended Form ADV Part 1 & Part 2 filings with the Securities Exchange Commission was filed timely 03/01/2017. If you would like a copy of this important disclosure document, please contact us at (303) 442-3670 or firstname.lastname@example.org and we will be happy to deliver it to you at no charge.
Mark P. Culver
Culver Investment Company, LLC
360 Interlocken Blvd
Broomfield, CO 80021
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