Three months ago, talk of accelerating economic growth and rising inflation was all the rage. Business activity would accelerate once President Trump implemented his pro-growth agenda, which included repeal of the Affordable Care Act and lower income tax rates for businesses and consumers.
In such a scenario, surely the Federal Reserve would be aggressive in raising the federal funds rate -- at least three increases were in the cards. In anticipation of such a scenario, interest rates across the board begin to rise. The yield on the 10-year U.S. Treasury note hit 2.6%; quotes of 4.375% on the prime 30-year conventional loan were occurring with greater frequency.
Fast forward to the present and we find the outlook has materially changed. Many economists have throttled back their growth expectations, and it appears for good reason when one vets the latest employment numbers. Payroll growth posted at a paltry 98,000 for March. This was the lowest monthly increase since June 2016.
President Trump’s pro-growth agenda, which was expected to be pushed through Congress at maximum velocity, has hit a political brick wall. Here we are in April, and Trump and the GOP have abandoned the Affordable Care Act issue. What’s more, the Trump administration has signaled there won't be any attempts at tax-rate cuts anytime soon.
Over the past month, exuberance has given way to apathy, which is reflected in a downturn in stock prices and an increase in risk avoidance. The yield on the 10-year Treasury note has dropped below 2.3%. Traders in fed funds rate futures contracts are giving good odds for a second Fed interest-rate increase; they’re giving only fair odds for a third rate increase. A month ago, they were giving good odds all around.
So it appears we are caught in an economic stasis. Given the gridlock in Washington, outside of war (which would be an obvious bad thing), there isn’t much on the horizon to get the economy or interest rates moving one way or another. Therefore, we see current rates continuing to dominate, though today we’d be even less surprised to see sub-4% quotes on a 30-year loan pop up with greater frequency.
Is Renting Really the Future?
It seems like everyone is getting into the renting game. Once the domain of individual investors, the single-family rental market has been invaded by large institutions spending billions of dollars to buy large swaths of single-family homes to rent. In fact, institutional investors (BlackStone Group, American Homes 4 Rent, Colony Starwood Homes, etc.) bought 3% of the single-family homes on the market in 2016.
Now, Housingwire reports that home builders are getting into the single-family-rental market: They’re building homes not just to sell, but to rent.
Is renting the future of the housing market? If you’re into extrapolating trends, it would appear so. Homeownership rates are at a 50-year low; first-time buyers are having an increasingly difficult time accumulating a down payment; student debt is on the rise; homes are increasingly unaffordable; more people have embraced a nomadic lifestyle, wishing to retain the ability to move freely from town to town (so we’ve been told).
That’s the market as it is now, but we don’t believe it’s the market of the future. Trends don’t extrapolate indefinitely. We think the future lies in a resurgence of owner occupancy.
When the impediments to homeownership are stripped away, you find a population that overwhelming wants to own a home. We think that want will eventually surface as increased demand. The market will evolve to accommodate the demand; it always does.
This is good for housing, whose foundation is the owner-occupied segment. As counterintuitive as it may seem, the historically low owner-occupancy rates we see today point to higher owner-occupancy rates tomorrow and a healthy long-term outlook for housing.