It looks to us that there are certain sectors of the residential housing market that are looking VERY good right now. On the other hand, there are plenty of sectors that can be frightening. It is wise to be careful.
What do we like? We really like the fundamentals of residential housing where the homeowners have been in their home for at least the past 3 years:
Let's dig in a bit more to highlight some of the positive aspects of these homeowners and their mortgages. We still think that we have entered a relatively new aspect of home ownership before rates began increasing quickly where the owners' balance sheet has been flipped such that the mortgage is the asset and the home the liability. Consider, the US has near the lowest mortgage rate on outstanding debt in 43 years averaging at 3.6%:
Locked in for 25 years+ in many cases, this is an incredible asset. Furthermore, the majority of borrowers have fixed rate mortgages. In 2006, over 50% of mortgages were adjustable rate (ARMs). Today, ARMs make up about 2% of all mortgages:
Looking deeper into the balance sheet idea, we have seen US mortgages at their lowest delinquency levels in 20 years. Mortgage delinquencies are the lowest out of all loan types, making up just 2.0% of all 90+ delinquent loans. Compared to credit card auto loans, which are at 8.2% and 3.9% respectively:
We like to highlight that in addition to these positive aspects, there are negative things going on relative to housing as well that is bolstering the sector. The main driver is the lack of supply and options available to homeowners today. New issue mortgages are at 7.23% and the cost of renting is going up at the same time. In addition, US housing inventory remains the lowest on record:
Of the sales that are actually occurring, nearly 3 times as many of those sales are from new homes compared to existing homes:
Thus, it does look like there are pockets of the residential sector that are very appealing for investors. Finding ways to invest in homeowners who have been in their homes for at least 3 years can be very attractive. In fact, it might be the fundamentally most attractive segment of the market overall.