MuniLand: Don’t Fight Demographics

Demographics can drive secular trends, and the SNW Team has positioned our strategies to benefit from a key mid-term secular demographic trend. That trend is accelerating household formation and increasing the number of first-time homebuyers. Demographic analysis suggests that after years of decelerating household formation the trend may reverse due to the important echo boomer cohorts of 30- to 34-year-olds and 25- to 30-year-olds finally leaving their parents’ basements, forming households and becoming first-time homeowners. It just so happens that the municipal market is well positioned to serve this population.

Housing Finance Agencies are in the crosshairs of the burgeoning first time homeowner demographic. As a reminder, the purpose of HFAs is to provide first-time and low- to moderate-income households with mortgage assistance and counseling. Housing Finance Agencies issue tax-exempt debt and use the proceeds to fund mortgages. HFAs take advantage of the arbitrage opportunity between the tax-exempt and taxable markets to provide cheaper mortgage financing relative to commercial banks, which increases demand for their product. 

The best part of HFA bonds are their strong credit qualities. Even if the business cycle shows signs of age or the interest rate environment becomes less accommodative, HFAs exhibit very high balance sheet strength, excellent mortgage loan characteristics, strong historical loan performance, flexible yet strong bond structures and active management of delinquent mortgages. We are overweighting the Housing Sector of the municipal market because of these solid credit factors and the positive demographic trends, which support our view of a stable to positive fundamental sector outlook. In addition, yields available in the sector are quite high versus other options in the municipal market, making HFA bonds an attractive option.