U.S. Housing - A 20,000 Foot View

Jul. 10, 2012 4:59 AM ETLEN, XHB, TOL, PHM48 Comments
Macro Economist profile picture
Macro Economist

A few weeks ago on Seeking Alpha, I had a debate with some members as to whether investing in US Real Estate - namely homebuilders - was a good idea or not. The discussion transcended into a debate over the outlook for U.S. housing. Let me be clear with this, I believe US Real Estate and all things associated with it (remodeling, brokering, furniture, etc.) is perhaps one of the most compelling long-term investment opportunities available to global investors today.

When evaluating investments for my clients, I first always attempt to understand the macro symmetry of the opportunity. One of the best ways to do that is to understand industry level dynamics relative to the economy as a whole.

Residential Investment

Take Residential Investment to start. As shown below, as a % of GDP, residential expenditures are at their lowest levels since our data set began (which includes the 1990's "bust"), but have seemingly troughed in both absolute $ and relative to GDP in the last year. Relative to non-residential capital investment, residential investment is at its largest spread ever.

Source: U.S. Government

Some will argue that this is no indication things will get better. I rebut that in my experience, "it can't get worse," is a perfectly legitimate investment criteria because it immediately frames your downside risks. Truncating downside risk is the first step in creating an asymmetric payoff profile.

Second, for those who continue to argue bearishly against US Real Estate, I say to have that view one would then have to be de-facto bearish on the US economy. I partially share this view (though I think an uptick is coming, which I will write about later), but I suggest you can find a lot better places within Non-Residential Investment sectors to place your short bets. Furthermore, in anything but the major recession scenario, I believe that

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Macro Economist profile picture
I am a 15 year veteran of the buy-side, with over a decade of experience in Investment Management, at one time overseeing several billion dollars in hedge fund assets for institutional clients. Currently, I advise wealthy families on their investment portfolios as well as trade my own money. Articles on Seeking Alpha are meant to be a snapshot of my views, but do not necessarily always reflect my portfolio. I also try to write on controversial and contrarian topics.All money received from Seeking Alpha activities is currently being donated to various charities, including the World Food Program and UNICEF.

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