U.S. industries tied to housing are likely to grow about four times as fast as the economy, making them top picks for investors, said Mark Kiesel, global head of corporate bond portfolios at Pacific Investment Management Co.
Housing starts will increase 15 percent a year until at least 2015, and home prices will rise more than 5 percent annually as demand recovers from the worst real estate crash since the Great Depression, Kiesel said at a March 26 Bloomberg dinner in Newport Beach, California, focused on housing. The economy will grow 4 percent in nominal terms, and less than 2 percent when adjusted for inflation, he said.
“Housing’s going to surprise people on the upside,” said Kiesel, who in January was named Morningstar Inc.’s 2012 fixed- income fund manager of the year. “But I don’t think the best way to play it is homebuilders.”
Pimco, based in Newport Beach, began investing heavily in the bonds of building-materials and appliance companies such as Masco Corp. (MAS), USG Corp. (USG), Whirlpool Corp. (WHR) and Weyerhaeuser Co. (WY) about 18 months ago, said Kiesel, who manages $130 billion, Pimco’s largest pool after Co-Chief Investment Officer Bill Gross’s portfolio. Kiesel put his own money into a rebound last May, buying a Newport Beach house after selling in 2006 when he decided the real estate bubble was set to burst.
An index of pending sales of U.S. homes fell 0.4 percent in February from the previous month as tight inventories and limited access to credit held back transactions, the National Association of Realtors reported yesterday in Washington. The gauge was at its second-highest level since April 2010, when federal homebuyer tax credits fueled a surge of sales.
New homes sold in February at an annual pace of 411,000, capping the best back-to-back months since August and September 2008, the Commerce Department reported earlier this week. The Standard & Poor’s Supercomposite Homebuilding Index has surged 63 percent in the past year, six times the gain in the S&P 500. Prices for existing homes sold in 20 cities jumped 8.1 percent in January from a year earlier, the biggest 12-month gain since June 2006, according to the S&P/Case-Shiller Index.
“We own banks, a play on reflation,” Kiesel said. “Not enough investors have inflation hedges. And I think you need them. I think housing is one effective inflation hedge.”
While investors buying houses to rent or resell have helped drive prices up from a post-bubble low, the U.S. unemployment rate must decline for the real estate market to sustain growth, Esmael Adibi, an economist at Chapman University in Orange, California, said at the dinner.
“Investors aren’t real demand,” Adibi said. “Real demand is driven by job creation and household formation. We don’t have enough job creation. We don’t have enough household formation.”
Deliveries of new homes have been slowed by builders and developers not having enough land prepared to meet demand, especially in places such as California, said Emile Haddad, chief executive officer of FivePoint Communities Inc., a developer of about 50,000 lots at master-planned communities in the state.
Land prices in FivePoint’s projects in Orange County, Los Angeles and San Francisco have jumped 40 percent in the past year as builders compete for property, he said.
“The next cycle’s going to be driven by the lack of supply more than by demand,” said Haddad, whose Aliso Viejo, California-based company’s biggest investor is homebuilder Lennar Corp. (LEN)
Sudha Reddy, chief executive officer of Haven Realty Capital LLC, a buyer of single-family rentals that’s partly financed by Apollo Global Management LLC, expects investment opportunities in that sector to last two more years before the El Segundo, California-based company considers selling properties.
“We believe there’ll be multiple exits, but we’re not overly concerned with how that plays out right now,” Reddy said at the dinner. “We’re focused on acquiring homes properly in the right markets and operating them, but we certainly see an exit strategy either to the end user -- individuals that want to come back to the homeownership market -- or possibly to larger portfolio buyers.”
Interest rates close to record lows have helped make homes more affordable, driving up buyer demand, Kiesel said. Federal Reserve policy makers led by Chairman Ben S. Bernanke plan to keep rates low as long as unemployment remains higher than 6.5 percent and inflation is projected to be no more than 2.5 percent. The Fed is buying $85 billion of Treasury bonds and mortgage-backed securities a month to stimulate the economy.
“Do you think the Fed wins the war?” Kiesel said. “My view is that the Fed will win and they’re going to expand the balance sheet until housing prices go up. I don’t think you want to bet against central banks.”
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