We think the housing cycle has further to go. Home prices have been supported by a lack of inventory, high demand with millennials at prime home-buying age, and low interest rates.

Since the housing crisis of the 2000s, we have underbuilt by close to four million homes, according to FreddieMac. The top chart shows the collapse in construction after the 2006 peak and financial crisis that took about a decade to recover.

Chart 1 US Housing - Building Permits

This lack of construction has led to very low existing home inventory as shown in the middle chart.

Chart 2 US Inventories of Homes for Sale

The lack of inventory, helped by very low interest rates, has led to higher home prices as shown in the bottom chart. This creates the incentive to build more homes to satisfy demand.

However, we believe it will take years to rebuild inventory to levels that match demand, especially with millennials in their prime home-buying years.

This should support home prices and explains why we do not consider this a housing bubble—yet.

Chart 3 Case Shiller Home Price Index

In terms of future home price gains, consumers are now balking at the high prices. The University of Michigan’s monthly Survey of Consumers shows the assessment of home buying conditions near all-time record lows due to higher prices. So, while the very high price gains are probably behind us, current prices should be supported by the lack of inventory.

Another important point to make is that we believe the banks are making solid loans—unlike the housing bubble of 2006- 2008 when many bad loans were made, which fueled the housing bubble.

We expect housing to make further positive contributions to economic growth and to continue providing a positive fundamental backdrop to housing-related industries.

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