The Los Angeles wildfires have incinerated tens of thousands of homes. This tragedy is playing out at a time when homes nationwide are in increasingly short supply.
Just as public policy is largely to blame for the crisis in California, the U.S. needs drastic policy changes if it is going to solve the key problems now affecting the residential housing market.
The Fed has jacked up interest rates to snuff out inflation but, paradoxically, this has made housing unaffordable to many.
Housing-related stocks have suffered, yet we see long-term opportunity as new housing supply growth will be necessary to solve the overall inflation problem.
We discuss a number of specific investment ideas below.
Housing is arguably the most sensitive part of the economy when it comes to the Federal Reserve’s interest rate manipulations.
The vast majority of households take a mortgage when they buy a home.
Since the interest rate they need to pay represents one of the largest costs of home ownership, movements in rates have a major effect on behavior within the housing market.
The housing sector is also quite large. Residential construction and housing related services historically represent more than 15% of the total U.S. economy.
Housing has become the main reason the U.S. is facing a persistent inflation problem.
In the most recent Consumer Price Index (CPI) report from the Bureau of Labor Statistics, the rate of inflation over the past 12 months that was attributed to shelter was 4.7%.
The overall rate of inflation was reported at 2.9%.
If you remove shelter from the CPI equation (which the BLS does through a line item called all items less shelter), the inflation rate drops to 1.7%.
Inflation ex-shelter is now actually below the Fed’s 2% target.
Housing and the Fed
When we think of the Fed trying to stimulate or suppress economic activity, it is important to understand the key transmission mechanisms.
While interest rates have a broad-based effect on commercial and consumer activity, they impact housing in an especially powerful way.
In the early 2000s, the burst of the dotcom bubble and the 9/11 terror attacks sent the U.S. economy into a tailspin. Greenspan’s Fed proceeded to cut rates aggressively.
This set the stage for a housing bubble (and subsequent collapse) of unprecedented proportions.