Mortgage Investors Need Not Fear Supply Surge From New Housing

(Bloomberg) -- Mortgage investors are unlikely to see a net supply surge even should interest rates continue to move lower, if only because the pace of new home construction is far slower than it used to be.

People use credit to purchase homes in the U.S., whether they are new or pre-existing structures, and almost every such transaction feeds supply into the agency MBS market. So a tepid pace of single-family homes being built will translate into less supply, benefiting mortgage investors.

That was underscored by Wednesday’s report on single-family housing starts, which came in at an annualized pace of 919,000. While well above the millennium-low of 353,000 seen in March of 2009, it remains below the 956,000 average seen since 1999. And its recent peak of 966,000 in January still can’t hold a candle to December 1999’s 1.375 million or the peak of 1.823 million at the height of the housing bubble in early 2006.

Agency MBS supply is forecast to drop to about $240 billion this year, down from $281 billion and $315 billion in 2018 and 2017, respectively, according to a recent report from Barclays Capital.

Single-family starts have dropped about 33 percent this millennium, even though the U.S. population has grown about 17 percent to around 327 million people over that time. One likely cause for the missing building recovery is the weakening of the U.S. dollar relative to residential real estate.

Home prices since 1999 have increased by about 118%, according to the S&P CoreLogic Case-Shiller 20-City home price index, or, to put it another way, the value of the U.S. dollar versus housing has dropped to 46 cents over that time frame.

This has easily subsumed wage growth while making it a losing proposition to save for a down payment using the dollar. The U.S. homeownership rate, at 63.9% now from the 69% seen in 2004, is trending at a level last seen in the late 1960s.

• Christopher Maloney is a market strategist and former portfolio manager who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Christopher Maloney in New York at cmaloney16@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, William Selway, Allan Lopez

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