Underlying Strength in Housing

As a follow-up to our note last week on increased lending, an article in the Wall Street Journal caught our eye as it relates specifically to homebuilder lending.  The housing market plays a powerful role in the US economy, not only from the job creation standpoint but also from the related spending on items such as furniture and appliances.  According to FDIC data, the outstanding loans for land acquisition, development and construction rose from $206B to $210B.  While this is a relatively small increase, economists claim that a growing balance likely means loan origination is growing faster.  We took this information and compared it to the housing fundamentals we continuously track.  Housing supply is back to pre-crisis levels, affordability is increasing (and well about the levels seen in the mid-2000s), and building permits are rising.  Put it all together and you have a housing market that will likely accelerate moving forward.  A strengthening housing market will drive economic growth, which increases the risk for a rise in interest rates.  This advocates for a defensive (lower duration) posture, which is how we’ve constructed our client portfolios.