Camelot Portfolios Talking Points

American Housing Picture

As summer starts kicking into high gear, backyard barbeques, lawn chores, and renovation projects start coming to mind. Corresponding to these household tasks is construction season. Most of us experience this every time we drive our cars on the roads, but its construction season for homebuilders.
The warmer weather in the summer naturally allows for higher productivity for this industry. The housing industry for the past several years has seen tremendous growth, but has the first half of 2017 continued on this trend?

Looking into the June release of new residential construction, the short term trends continue to send a mixed message for growth. Housing starts for the month of May trickled down to a seasonally adjusted rate of 1.092 million units (US Dept of Housing and Urban Development). This is a decrease of 5.5 percent month over month from April (US Dept of Housing and Urban Development). 2 of the 4 regions devised by the census bureau decreased month over month; the Northeast and Midwest corridors continue to grow (US Dept of Housing and Urban Development).

Considering that construction starts only tells us how many home are being built, we need to consider the price inflation. As of 2016, the median price per square foot to build a new home was $97.19/foot2 (Census Bureau). This is a 5.46 percent increase from 2015 and a 3.86 percent increase over a five year period (Census Bureau). Considering that inflation over this time period was on average 2 percent, housing has diverged from this measure creating a mismatch in affordability (Trading Economics).

Diving deeper into the supply side of housing, the monthly supply of homes continues to stay within a bounded range from month to month. As of April 2017, the monthly supply of houses was 5.7 months. This is a slight uptick from 4.9 in March. Over the past 5 years, the supply ranged from a minimum of 4 months in January of 2013 to a maximum of 6.1 in July of 2014 (Census Bureau).

The other significant factor pushing home prices higher are the continued low interest rates being offered. As of June 21, 2017, the interest rate for a 30 year fixed mortgage is 3.91 percent (FreddieMac). While the Fed continues to increase short term interest rates, longer term interest rates continue to remain relatively unchanged.

A Tightening in the Credit Market

While the Fed’s decision to raise short term interest rates was considered baked in by analysts, the fixed income market continues to flatten across this market. The spread between the 10 year treasury and the 2 year treasury has tightened to 83 bps (Saint Louis Federal Reserve). This is a 45 bps tightening over a 6-month period (Saint Louis Federal Reserve).

Other credit instruments continue to tighten as well; the option adjusted spread between all bonds in a given rating category is 3.77 percent (BofA Merrill Lynch). This is a 5.10 percent decrease over last year’s speculation and shakeup in the oil market (BofA Merrill Lynch). This flattening between durations and quality continues to increase overall prices of bonds because of their inverse nature relative to interest rates.  

Compiled by the Camelot Portfolios Investment Committee

Darren Munn, CFA, Chief Investment Officer

Eric Kartman, Research

Drew Steinman, CPA, Trader/Research

Zach Hartenburg, Analyst

Frank Echelmeyer, MBA, CKA®, Advisor Consultant

-for Broker/Dealer and RIA use only-

 References

BofA Merrill Lynch. BofA Merrill Lynch US High Yield Option-Adjusted Spread. 2017. web. 2017.

Census Bureau. Median and Avg Price per Square Foot. 2016. document. 2017.

FreddieMac. 30 Year Fixed Rate Mortgage. 2017. web. 2017.

Saint Louis Federal Reserve. 10 year treasury minus 2 year treasury . 2017. web. 2017.

Trading Economics. US Inflation. 2017. web. 2017.

US Dept of Housing and Urban Development. Monthly New Residential Construction. June 2017. 2017.

 The material presented is for use by professional advisors only.  It is intended as informational and educational, and is not intended to be interpreted as investment advice.  The references to specific investment ideas, be they concepts, trends, sectors or even specific securities, are not recommendations for any advisor to adopt for any of their clients.  No investor or client reading these materials should view them as investment advice.  These materials are to be utilized as a catalyst for thought and discussion regarding the economy, investments, and responsible investing in general.  Past performance is not necessarily indicative of future returns, and there is no guarantee that any information presented herein will contribute to a profitable portfolio.  All facts referenced herein are derived from sources believed to be reliable.  

Any charts, graphs, or visual aids presented herein are intended to demonstrate concepts more fully discussed in the text of this brochure, and which cannot be fully explained without the assistance of a professional from Camelot Portfolios LLC.  Readers should not in any way interpret these visual aids as a device with which to ascertain investment decisions or an investment approach.  Only your professional adviser should interpret this information.  A449