The Three Pillars of the US Housing Recovery

Transcription

1 Investment Forum The Three Pillars of the US Housing Recovery For years an albatross around the neck of the US economy, America s housing market is taking flight. Understand. Act.

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3 Investment Forum Content The Three Pillars of the US Housing Recovery Favorable fundamentals 7 A lack of inventory 9 Monetary support 10 What it all means Imprint Allianz Global Investors Europe GmbH Mainzer Landstraße Frankfurt am Main Global Capital Markets & Thematic Research Hans-Jörg Naumer (hjn) Dennis Nacken (dn) Stefan Scheurer (st) Maximilian Loebermann (ml) Data origin if not otherwise noted: Thomson Reuters Datastream 3

4 Investment Forum The Three Pillars of the US Housing Recovery America s housing recovery was a recurring touch-point at the Allianz Global Investors semi-annual Investment Forum in Frankfurt in January. Several of our experts reported that a favorable outlook for real estate was supportive of overall economic growth in the US. Indeed, a 17 % surge in residential investment during the final quarter of 2012 partially offset deep cuts in government spending, leaving overall Gross Domestic Product (GDP) in positive territory. We believe the housing recovery is real, is gathering momentum and will continue to buoy growth in the near to medium term. The tide has turned. After years of crushing weakness, housing is again at the forefront of the US economy. Compared to December 2007 the month America entered the Great Recession existing home sales have increased 12 %. That outpaces concurrent upturns in consumer spending, manufacturing, inflation, nonfarm payrolls and overall GDP. And, unlike prior homebuyer tax credit flameouts, we think the current recovery is sustainable. This view is built on three supporting pillars: Favorable fundamentals A lack of inventory Monetary support Favorable fundamentals Until recently, the recovery in housing was stunningly feeble. Seven years after peaking, home prices today are still nearly 30 % below 2006 levels. Yet, while prices remain constrained, the fundamental argument for housing has strengthened considerably. The cost of financing, for example, is absurdly cheap. Last November, the average rate on a 30-year fixed mortgage touched an unprecedented 3.31 %. (See Chart 1)

5 Chart 1: Mortgage Rates 20 % Max: (Oct-81) Min: 3.31 (Nov-12) Last: 3.52 (Mar-13) 16 % 12 % 8 % % Year Average Mortgage Rate Average Source: Freddie Mac; Allianz Global Investors; as of 3/8/13 More broadly, as unemployment has pushed lower, consumer confidence has improved. A more-than doubling in the Standard and Poor s (S&P) 500 since 2009 is driving household net worth back to near pre-crisis levels. Importantly, the household debt service ratio the amount of income required to cover debt costs has declined to 10. %, a level not seen on records beginning in (See Chart 2). This is a huge relief for consumers, and it frees-up money for other purposes. From a housing perspective, the fundamental argument for the recovery is further supported by affordability, a gauge of the cost of ownership relative to home prices, mortgage rates and average worker wages. In February 2013, affordability approached the highest level on record, statistically more than three standard deviations from the norm. (See Chart 3) Chart 2: Household Debt Service Ratio Max: 1.09 (Sep-07) Min: (Dec-12) Last: (Dec-12) 1 % 13 % 12 % % 10 % Household Debt Service Ratio Average Source: Federal Reserve; Allianz Global Investors; as of 12/31/12 5

6 Investment Forum Chart 3: Housing Affordability Index Source: National Association of Realtors; Allianz Global Investors; as of 2/28/13 The word is out. From consumers to investors and construction executives, the concept of risk as it relates to real estate has shifted. In January, more than 6 % of Americans had plans to buy a home, the highest number in more than six decades. Industry optimism which is near a six-year high is being backed with hard money: New permits for homebuilding are up 35 % in the past twelve months. Unsurprisingly, home values have begun to bounce off of crisis-era lows. The S&P / Case- Shiller 20-City Price Index increased 6.8 % in December (year-over-year), the seventh consecutive month of gains and the steepest since (See Chart ). Nineteen cities in the index advanced, with prices in San Francisco and Detroit up more than 13 %. Prices in Phoenix rallied 23 %. For the first time in a long time, a virtuous cycle is developing. News of higher prices is releasing pent-up demand, inviting additional buyers into the market. Credit access is slowly improving as banks become more comfor table with the trajectory of the economy. Still, in contrast to the subprime bubble, when little more than a heartbeat was needed to obtain a loan, the average buyer today has a higher credit score, and the average lender today has far stricter standards. Adjustable rate mortgages (ARMs) ubiquitous during the bubble years accounted for just 5 % of the loans originated in In December, almost 30 % of home purchases were all cash. Chart : S&P/Case-Shiller 20 City Price Index 15 % 10 % 5 % Annual Change 0 % 5 % 10 % 15 % 20 % S&P/Case-Shiller 20 City Price Index Source: Standard & Poor s; Allianz Global Investors; as of 12/31/12 6

7 Chart 5: New Homes For Sale 600 Max: (Jul-06) Min: (Jul-12) Last: (Jan-13) 500 Units (Thousands) New Homes For Sale Average Source: Census Bureau; Allianz Global Investors; as of 1/31/13 A lack of inventory There are two common ways to think about housing inventories: The raw number of homes available for sale on the market and the amount of time it would take to deplete that stock at the current sales pace. From a raw numbers standpoint, the current shortage is profound. Existing home inventories are down more than 20 % in the past year and nearly 0 % since the end of New home inventories are at the lowest levels in 50 years, down more than 70 % compared to (See Chart 5) At the current pace of sales, it would take only.2 months to exhaust the entire stock of existing homes and.1 months to drain the current number of new homes on the market. Where other housing indicators are healthy, these figures are comparable to those seen during the height of the boom in April Unlike then, when shortages were generated by overwhelming demand, today s gap is the product of four supply-side factors: First, during the bust, new home construction effectively stopped. For four years between 2008 and 2012 building stagnated at levels unseen on records dating to 1959 (unadjusted for population growth). Despite a nearly 50 % spike at the end of 2012 (year-over-year), current construction is still 75 % below levels seen in (See Chart 6) Second, with prices still so far below peak, negative equity where a home is worth y less than the home loan is preventing many would-be sellers from accessing the market. So-called underwater homeowners are unable to complete traditional sales without shouldering the difference between the sales price and the amount still owed on their loan. 7

8 Investment Forum Chart 6: Housing Starts 2,500 Min: (Apr-09) Last: (Jan-13) 2,000 Units (Thousands) 1,500 1, Housing Starts Average Source: Census Bureau; Allianz Global Investors; as of 1/31/13. Third, prospective sellers are waiting for future price gains. Why sell today when you think you could get more tomorrow? Finally, the combination of rising home prices and falling joblessness has resulted in a plunge in distressed properties. Federal Housing and Finance Agency figures show that in the two years to September 30, 2012, foreclosure starts declined 0 %. During the same period, the inventory of bank-owned properties fell 35 %. (See Chart 7) These dynamics are reinforced by the fact that aside from family or shared living arrangements substitutes for homeownership are sparse. While investors are converting homes into rental properties at a rapid pace, rental inventories remain exceptionally tight. Vacancies have been falling since late At the end of 2012, the proportion of available rental properties on the market was near a decade low. 8

9 Chart 7: Real Estate Owned (REO) Activity & Inventory Bank owned properties have declined as dispositions outpace acquisitions. Bank Owned Inventory By State (Number in thousands) % drop REO Activity 1Q09 2Q09 3Q09 Q09 1Q10 2Q10 3Q10 Q10 1Q11 2Q11 3Q11 Q11 1Q12 2Q12 3Q12 Acquisitions 39,362 5,092 65,332 71,938 91,31 103,500 12,02 69,733 78,256 78,85 69,572 72,01 71,505 63,816 62,186 Dispositions 0,72 8,29 9,238 5,1 58,723 75,832 7,206 76,89 9,1 100,55 83,678 75,163 77,10 7,73 66,585 Inventory (at period end) 91,516 97,31 113,08 131, , ,88 21,68 23, , , , , ,6 162, ,138 All Other States Selected Midwest States* California Florida Arizona Nevada Source: Federal Housing Finance Agency; Allianz Global Investors; as of 9/30/12 * Selected Midwest states are Illinois, Indiana, Michigan and Ohio Monetary support Housing plays a vital role in the Federal Reserve s mandate to maintain price stability. This is because changes in home values are a primary determinant in whether the economy faces inflation (rising prices) or deflation (falling prices). Within the Consumer Price Index a flawed but useful tool that describes how the average American spends money housing is the largest single component, accounting for 1 % of all spending. That is more than twice as much as transportation (17 %) and approaching three times as much as food and beverages (15 %). Policymakers are aware that, in today s subpar economic environment, another leg down in housing could nudge the country into a deflationary spiral. Once deflation catches hold, it can be very difficult to overcome. For large-scale debtors, such as the US government, deflation is particularly dangerous. This is because when prices fall, the real value of debt rises. 9

10 Investment Forum Resolve to support the housing recovery is evident in Federal Reserve monetary policy. Mortgage-backed securities make up almost half of the US $ 85 billion in assets the Fed buys each month through its quantitative easing programs. Since 2008, the Federal Reserve System (Fed) has accumulated more than US $ 1 trillion in mortgage debt, about 7 % of the entire US residential mortgage market. (See Chart 8) What it all means We expect the housing recovery to support the US economy on several fronts. Most important among these are consumer spending, investment and employment: Consumer spending. As home values rise, consumers tend to feel more comfortable with their personal economic outlook, which makes them more willing to spend. The wealth effect associated with housing is statistically stronger than that associated with stock market gains, as demonstrated in a January 2013 working paper for the National Bureau for Economic Research by Karl Case, John Quigley and Robert Shiller. They found that for every 10 % increase in home prices, consumer spending which runs about US $ 10 trillion annually tends to rise %. Investment. While it is unlikely housing will regain its pre-recession stature any time soon, even a return to pre-bubble levels would mark a substantial improvement from an investment standpoint. For example, back-of-the-envelope math shows that the direct impact of a return to 2002 levels of real estate investment this year would add 1.8 % to GDP (roughly 0.5 % per quarter). Prospective Economic Impact of a Return to 2002 Levels of Housing $ 13,591 Size of US economy in 2012 (All figures in Billions) $ 61 Money spent on residential housing in 2002 $ 367 Money spent on residential housing in 2012 $ 27 Difference between 2002 and 2012 housing spend 1.82 % Difference as a percent of 2012 GDP 0.5 % Difference expressed on quarterly basis Source: The US Bureau of Economic Analysis and Allianz Global Investors; as of 12/31/12 Chart 8: Mortgage Debt Purchases Billions of Dollars 3,333 3,000 2,666 2,333 2,000 1,666 1,333 1, Mortgage Debt Purchases 01/07 05/07 09/07 01/08 05/08 09/08 01/09 05/09 09/09 01/10 05/10 09/10 01/11 05/11 09/11 01/12 05/12 09/12 Traditional Security Holdings Liquidity to Key Credit Markets Long Term Treasury Purchases Lending to Financial Institutions Fed Agency Debt Mortgage-Backed Securities Source: Cleveland Federal Reserve; Allianz Global Investors; as of 3/6/13 10

11 Chart 9: Appropriate timing of policy firming Number of FOMC participants Source: Federal Open Market Committee; Allianz Global Investors; as of 12/12/12 Employment. Today, there are more than one million fewer construction jobs than there were in 2002 and more than two million fewer than there were in Again, while a quick return to pre-bubble employment isn t likely, we expect the housing recovery will support job growth. In the three months to February 2013 a seasonal slow period construction firms added 111,000 jobs, accounting for almost 20 % of total payroll gains. In the context of relentless fiscal stress in Washington, the US housing recovery could hardly come at a better time. While policymakers may reduce support if bubble condi- tions return, given the current state of the economy and the risks involved, we think they will err on the side of caution. The Fed has stated that policy tightening won t occur until unemployment falls below 6.5 % or inflation crosses above 2.5 %. The consensus view at the Fed is that neither condition will be met until at least (See Chart 9) Financial repression the quiet destruction of government debt through inflation is one of our overarching macroeconomic views at Allianz Global Investors. A rise in US home prices is one area of potential fall-out. Greg Meier and Kristina Hooper Greg Meier, is a strategist on the US Investment and Client Strategies team at Allianz Global Investors. Kristina Hooper, CFP, CIMA, is US head of Investment and Client Strategies at Allianz Global Investors. 11

12 Investment Forum Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors may not get back the full amount invested. Past performance is not indicative of future performance. No offer or solicitation to buy or sell securities, nor investment advice / strategy or recommendation is made herein. In making investment decisions, investors should not rely solely on this material but should seek independent professional advice. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer and / or its affiliated companies at the time of publication. Forecasts are inherently limited and should not be relied upon as an indicator of future results. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or willful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This is a marketing communication. This material has not been reviewed by any regulatory authorities, and is published for information only, and where used in mainland China, only as supporting materials to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors US LLC, an investment adviser registered with the US Securities and Exchange Commission; Allianz Global Investors Europe GmbH, an investment company in Germany, subject to the supervision of the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) RCM (UK) Ltd., which is authorized and regulated by the Financial Services Authority in the UK; Allianz Global Investors Hong Kong Ltd. and RCM Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No Z]; and Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator. 12

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14 Allianz Global Investors Europe GmbH Mainzer Landstraße Frankfurt am Main April 2013