The US housing market has been in the spotlight over the last few months as monthly statistics consistently pointed towards a healing market.

Notwithstanding this, the growth in supply did not help to support a turnaround in homeownership rate. Indeed, construction investment remains low when benchmarked against GDP and a recent statistical release revealed that only 63.4 per cent of the US households are owners, the lowest reading in 25 years (back in 2009 this percentage stood at over 69 per cent).

Of note, whereas in the early stages of the recovery the fall in home-ownership was blamed on declining household formation (i.e. people delaying marriage), the latter started recovering without feeding into ownership.

The counter effects of these dynamics have been higher rents and pickup in house prices (although these remain well below the pre-crisis levels). I did not come across any official estimate on the percentage of renters, but the rapid fall in the rental vacancy rate does support the argument that this market is heating up. To put some numbers, for Q2 2015 the US Census Bureau reported that the vacancy rate reached 6.8 per cent, another multi-year record low.

It should thus come as no surprise, that one of the key supportive sectors for inflation has been the housing market (formally reported as shelter inflation). What is more, this has led to a growing divergence between two of the inflation metrics – core Consumer Price Index (CPI) and core Personal Consumption Expenditure Price Index (PCE) - as shelter has a higher share in the CPI basket.

Noteworthy, the Fed has traditionally put more emphasis on PCE rather than CPI as the former is more aligned with the GDP measure of consumption (i.e. it is based on a dynamic consumption basket). Indeed, the Fed’s commentaries on inflation routinely refer to PCE, and the staff projections only include core PCE projections. However, given the dynamics in the housing market, the latest core PCE reading stood at 1.3%, while the core CPI was reported to be 1.8 per cent.

So what should the Fed do? Hiking rates will clearly act as drag on housing activity, likely resulting in slower price increases or even a correction. A similar trend should be observed for rents.

However, the home ownership rate is unlikely to improve significantly in this scenario, as this would have broader economic implications such as lower consumption spending (owners spend more than tenants). An alternative is to maintain an easy monetary policy for longer and foster a slowdown in house price gains via higher supply. In this case the ownership rate should recover. In any case there are other factors which should make policymakers favour a piecemeal and slow increase in rates.

Against this backdrop, US house builders should continue to see an improvement in financials although markets might start differentiating between those issuers more exposed to the oil-sensitive Texas region and the more diversified names. Likewise, given the flourishing rental markets constructors more exposed to multifamily units could be put at an advantage.

Disclaimer: This article was issued by Raluca Filip, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article is 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. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.