Following the market collapse way back in 2008, the real-estate market experienced a rough patch which persisted until 2011, as investors lacked confidence of a possible positive U-turn. Investors’ pre-assumptions were based on the fact that the industry would struggle to recuperate, primarily due to high levels of unemployment.
In the first months of 2012, the Housing market began to gain confidence as investors commenced dipping-in the market following the crash which had led to depressing prices.
In fact, the S&P/Case-Shiller 20-City Composite Home Price Index, which measures changes in residential house prices in 20 metropolitan regions in the United States kicked-off its ascending momentum. From 2012 till-date the said index locked an appreciation of 38 per cent. The enthusiasm towards the sector was also supported by a low mortgage lending rate.
The current scenario
This week’s released data showed that purchases of new homes surprisingly dropped more than forecast in January as signed contracts plunged primarily in the western U.S., mostly since May 2010. As opposed to December 2015, in which sales were noted at an annualized pace of 544,000, the strongest in 10 months, in January the said figure declined to 494,000, thus down by 9.2 per cent over the prior month.
The median forecast of economists surveyed by Bloomberg called for 520,000.Despite the registered decline, the drop recorded in the month of January signals that new-home purchases are more in line with the steady pace of progress since the end of the recession.
On the contrary, existing home sales unexpectedly rose in January to the second-fastest pace since February 2007. The registered gain was that of 0.4 per cent, thus beating market expectations of a 2.9 per cent drop. Prices climbed from January 2015 as the number of dwellings on the market dwindled.
Clearly, the residential real estate market continues to benefit from an improving U.S. economy. Healthy gains in employment, promising wage growth and cheap borrowing costs are amongst the main drivers for improving housing data.
As said the unemployment sector is one of the main factors driving the improving momentum. Following substantial monetary easing policy, the rate now hit lows of 4.9 per cent from levels of just over 8 per cent in 2012. At this current level some economists argue that the U.S. is currently experiencing a ‘natural level of unemployment’, defined as a combination of both structural and frictional unemployment that persists in an expanding economy. Despite others argue that this is debatable.
Likewise, promising wage growth figures are sustaining the expansion within the real-estate sector, as the current wage growth of 4.46 per cent as at December 2015 kept its positive momentum following lows of below 2 per cent in 2014.
Furthermore, the average lending rate on a 30-year fixed mortgage was held at 3.65 percent last week, the cheapest since April and close to the record-low of 3.31 percent reached in 2012.
Thus persistent job creation, signs of bigger wage growth and cheap borrowing costs are buoying sales and helping alleviate the weakness in factory output tied to sluggish global demand.
Turning to the macro environment, while 2016 consensus U.S. in terms of gross domestic product, growth projections have moderated, the positive signs in the housing data are seen as still favourable, with home price appreciation, housing turnover, and household formation being the key drivers of growth.
Thus despite investors might still shy away from the sector following the crash which prickled global markets, opportunistic investors’ might opt in allocating a portion in their portfolio through corporate issuers which are exposed to the real-estate sector or alternative investments such as mortgage-backed security. Opportunistically saying, the housing market might be one of the U.S. economy's bright spots for years to come.
This article was issued by Jordan Portelli, Junior Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt .The information, views and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.