Quick Takes: Will Rising Rates Hurt the Housing Market?

PIMCO is constructive on the U.S. housing market for three reasons: price, supply and demand. Daniel Hyman, co-head of PIMCO’s agency mortgage portfolio management team, provides insight into the factors that inform our favorable view of the housing market.

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Hyman: One of the questions we get from investors is, given the recovery we've seen in U.S. residential real estate since the financial crisis, are we still optimistic on U.S. housing? The short answer is, "Yes."

When we look at it from a price perspective, housing remains attractively priced. When we look at the supply and demand technical, there still aren't enough houses for the expected demand. PIMCO remains optimistic on U.S. residential real estate.

When we look at home prices, housing remains affordable relative to where it was before the financial crisis. One of the ways many people think about housing is, is it cheaper to buy a home or is it cheaper to rent? And what we see is, is that it is still cheap today to buy rather than to rent.

Now interest rates are rising, making home purchases a little bit less affordable, but they would need to rise substantially more to offset the cheapness.

Interest rates would need to rise about 1.5% to normalize the long-term relationship.

A second reason PIMCO has a favorable view of US residential real estate is we've been underbuilding since the financial crisis. When we look at the number of homes needed for household formation — this is people moving out of their homes and going out on their own, creating a new household, or immigration — we see there hasn’t been enough homes built to meet that demand. We've been under-building since the financial crisis, under-building by one and a half million homes.

One of the ways we look at future supply is we look at the amount of permits that are filed, and will there be enough homes in the future to meet that household formation demand?

And what we see today is we're still not expected to build enough homes to meet that demand. This favorable technical we believe is supportive of US residential real estate, and leaves us with a favorable view of US housing.

To summarize, PIMCO maintains its optimistic view on US residential real estate, for three main reasons:

First, looking at housing on a national level, housing remains cheap to buy versus rent.

Second, household formations remain robust, meaning there's lots of households being formed, people going out and needing a home.

Third, on the supply side we're not building enough homes to meet that household formation demand.

It's for these three reasons — price, supply and demand — that PIMCO maintains its optimistic view on US residential real estate.

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