Quick takes on capital markets

06 May 2022

U.S. housing market: Resilient through rising mortgage rates

The extreme supply-demand imbalance should support demand for new homes even as rising mortgage rates impact affordability. The construction industry stands to benefit from this resilience, particularly with gains for timberland and timber-stocks.

NAHB/Wells Fargo Housing Market Index and new single-family starts
Index level, starts are in thousands, 1985 – present

Housing market index level 1985 to the present.
Source: U.S. Census Bureau, Principal Global Investors. Data as of April 30, 2022.

The Federal Reserve’s hawkish turn has helped drive U.S. Treasury bond yields 160bps higher since the start of 2022. U.S. mortgage rates have also been ratcheting higher: Freddie Mac reports that the average 30-year mortgage rate has risen to 5.27%, the highest since 2009.

Although affordability is certainly declining, broad housing data remain sturdy. The NAHB/Wells Fargo Housing Market Index, which measures market conditions for the sale of new homes, remains in solid territory; housing starts are at a cycle high of almost 1.8 million units; and the S&P Case Schiller Home Price Index continues to appreciate.

There’s good reason to expect resilience. Household leverage is relatively contained, while lenders themselves have solid credit quality, reducing the risk of a wave of defaults. In addition, with the inventory of existing homes for sale at all-time lows, there’s an extreme supply-demand imbalance, which should support new home demand.

The construction industry, and timberland and timber-related stocks in particular, stand to benefit from the resilience. 25% to 33% of the roundwood harvested annually in the U.S. is used in construction, so solid new homes sales should continue to support demand for wood products. As U.S. housing market strength has been one of the key tailwinds for timber investments in the last half-decade, there’s no need to shout “TIMBER!” on the market just yet.

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