U.S. Housing starts for March 2014 stood at 946,000, comprising single-family starts of 635,000 and multi-family starts of 311,000. These figures demonstrate an increase of 3% compared to data from February 2014 and a decrease of 6% compared to data from March 2013. Annual U.S. housing starts were 925,000 in 2013, an 18.4% increase over 781,000 in 2012. Severe weather conditions in Q1 have caused housing data to appear weaker than expected. Thus, although March figures are down year over year, I believe that a growth rate of 18-20% over 2014 figures will hold for 2014, so I would forecast housing starts for 2014 to be around 1,100,000.
I believe that the U.S. housing market is building new homes at a lower rate than the long-term run-rate. Even though US mortgage rates sit at 4.34% in March 2014, these rates are still low compared to historical mortgage rates during peak housing starts, as shown in the following table.
Peak Housing Starts vs. Mortgage Rates
|Peak Housing Year||Housing Starts ('000s)||Mortgage Rates||Affordability Index|
There was concern that continued tapering would lead to increasing mortgage rates that may curtail the housing recovery. Nevertheless, despite rate increases, I believe that income growth should offset the effect of increased monthly payments from a potential rise in mortgage. According to the NAHB, the median price for an existing home stands at around $200,000. Assuming a 30-year fixed rate mortgage with 20% down payment, the monthly mortgage payment sensitivity vs. interest rates can be seen in the table below. Thus, an increase in mortgage rates from 4.5% to 6.0%, would result in an annual increase of $1692 in payments. This increase in payment required could be offset by a 2.64% increase in median household income, which stands at around $64,000, according to census data.
Mortgage Payment Sensitivity Table
|Interest Rates||Monthly Mortgage Payment|
Overall, I believe U.S. housing should continue to improve despite concerns surrounding rate increases. There are multiple ways to play the rise in housing, including MBS, Mortgage REITS, Equity REITS, and home construction companies.
iShares Barclays MBS Bond ETF (NYSEARCA:MBB) sits on the low risk end of the spectrum. MBS payments are guaranteed by Fannie, Freddie, and Ginnie, so prepayment risk is the main concern.
iShares FTSE NAREIT Mortgage Plus Capped Fund (NYSEARCA:REM) tracks an index that is composed of REITs, which lend directly to real estate owners or purchase MBS. Risk is higher, but yield is also higher at 11-13%.
iShares FTSE NAREIT Residential Plus Capped Fund (NYSEARCA:REZ) tracks an index that consists of Equity REITs. The underlying REITs own and operate real estate.
Home construction companies would see the greatest benefit from an increase in housing starts. iShares Dow Jones U.S. Home Construction Index Fund (NYSEARCA:ITB) tracks an index consisting of common stock of real estate development companies. At the high risk end of the spectrum, single stocks within the group include Trex Company (NYSE:TREX), which manufactures building materials for decking and railing, and Masonite International (NYSE:DOOR), which manufactures interior and exterior doors.
Some risks to my thesis include a steep increase in rates leading to higher mortgage payments that outstrip income growth. An increase in rates could also lead to stagnant housing price growth and deter housing starts.