In its November report, mortgage security firm Freddie Mac called 2017 the “best year in a decade” for the housing market by a variety of measures. These include low inflation, strong job growth and historically-low mortgage rates. This assessment is very encouraging, not just for homebuyers and builders and the U.S. economy in general, but also for commodities, resources and raw materials as we head into 2018.
Although past performance is no guarantee of future results, it’s still instructive to look back at how materials performed the last time the U.S. was ramping up housing starts and mortgages. The last housing boom, which peaked in 2006, was accompanied by elevated commodity prices. We could see a return to these valuations over the next couple of years on higher demand, a stronger macroeconomic backdrop and cyclical fundamentals, as shown in the following chart courtesy of DoubleLine Capital:
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Speaking on CNBC’s “Halftime Report” last week, DoubleLine founder Jeffrey Gundlach said he thought “investors should add commodities to their portfolios” for 2018, pointing out that they are just as cheap relative to stocks as they were at historical turning points.
“We’re at that level where in the past you would have wanted commodities” in your portfolio, Gundlach said. “The repetition of this is almost eerie. And so if you look at that chart, the value in commodities is, historically, exactly where you want it to be a buy.”
A Wealth of Positive Housing Data
There’s more to support the commodities narrative than cyclicality.
For one, home builders right now are more confident of the future than they’ve been in over 18 years. December’s National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) soared to 74, eight points up from the November reading and its highest report since July 1999.
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NAHB Chairman Granger MacDonald chalks up the incredible improvement in optimism to “new policies aimed at providing regulatory relief to the business community.” Other contributing factors include low unemployment rates, favorable demographics and a tight supply of existing home inventory.
In addition, new housing starts in November rose to a seasonally adjusted annual rate of 1.3 million, up 3.3 percent from October and a strong 12.9 percent from a year ago.
This is all very constructive (no pun intended), as the market is still trying to recover nearly a decade following the subprime mortgage crisis.
Millennials, the Largest U.S. Generation, Finally Entering the Market
We’ve seen booms and busts in new housing starts over the past several decades, but homeownership rates in the U.S. took a huge blow as a result of the Great Recession. The rate dipped to a 51-year low of 62.9 percent in the second quarter of 2016, indicating buyers, especially first-time millennial buyers, are still struggling to save up for down payments.
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Economists with the National Association of Realtors (NAR) note that student debt has played a massive role in delaying homeownership for young …read more
Source:: Frank Talk
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