Last week, we explained why consumption — which accounts for two-thirds of the US economy and the key driver of growth — will slow and its repercussions on the equity market, which is already trading near the high end of historical valuations. This time around, however, the housing market (we think) will be resilient in the expected economic slowdown. We also think that homebuilders as well as major retailers in the home improvement industry are defensive plays — supported by both underlying demand and supply dynamics.
The bursting of the US housing bubble — which was driven by excessive speculation supported by easy credit, including from poorly understood and inadequately regulated complex financial products such as collateralised debt obligations (CDOs), where subprime mortgages were pooled, packaged and sold as low-risk instruments at low interest rates — was the key catalyst that triggered the Great Recession in 2007 and the global financial crisis (GFC).
Total home sales and prices plunged sharply in the ensuing years, given that both homeowners and homebuilders were highly leveraged as active participants in the housing bubble. Many ran into financial problems, defaulting on their loans, with some even falling into bankruptcy. That then led to a decade of slow consumer demand, dragging on the economic recovery, and underbuilding, as households and homebuilders repaired their balance sheets. It also resulted in the current situation in the US housing market — a chronic shortage, ageing homes and rising prices.
