Despite these headwinds, we see pockets of pent-up demand.
Housing costs have soared so much that in many parts of the country, renting has become more affordable than owning. Nonetheless, the overall percentage of US renters is declining. In our view, this is because most Americans prefer owning—and they fear missing out on home price appreciation. If these trends continue, a falling percentage of renters should ultimately support home prices.
In a similar vein, we expect increased future demand from millennials and first-time homebuyers. Many millennials are now in their 30s—prime homebuying age—but a good chunk of them are still renting or living at home, creating a potential source of pent-up demand. Over time, lower rates and the normal progression of life events, such as marriage and children, should pull millennials into the home market and contribute to years of structurally higher demand.
In a sense, we’re seeing a tug of war between limited inventory and moderating demand. When the dust settles, we expect supply constraints to win the day, leading to a modest uptick in home prices in 2024.
Sound Fundamentals Create Investment Opportunities
Despite affordability challenges, the current housing backdrop is creating meaningful opportunities for investors.
In particular, we believe credit risk-transfer securities (CRTs) could benefit from high homeowner equity, declining loan-to-value ratios and low mortgage delinquency rates. CRTs pool thousands of mortgages that conform to Freddie Mac and Fannie Mae standards into a single security. They’re not government guaranteed (despite, in most cases, being issued by Fannie Mae and Freddie Mac), so yields are competitive.
We also see opportunities in agency mortgage-backed securities (MBS).
MBS spreads have climbed to 20-year highs in recent years, owing to heightened market volatility and monetary-policy tightening. Relatively wide spreads and cheap valuations are a one-two punch that has historically generated competitive returns. Until interest rates retreat from their lofty heights, we don’t foresee MBS spreads narrowing dramatically, but we expect them to perform well if growth slows or market volatility subsides. Even with slowing demand for MBS on the part of banks and international investors, a relatively constrained supply should provide some buffer.
It’s been an interesting few years for the US housing market, which has defied the odds against a backdrop of rising rates. Until housing starts to keep pace with pent-up demand, we expect prices to remain elevated and homeowners to stay put.
