Residential investment as a percentage of GDP has fallen off of the proverbial cliff in recent years. Most recently it has stabilized at just over 2%, levels not seen in at least five decades. In fact, over this span residential investment has never been lower than 3% of GDP, and has averaged close to 4.5%. This is of great interest to us, as any type of reversion to the mean could have massive implications. Even if this metric were to merely approach prior trough levels, we believe that certain homebuilders and other related stocks could have strong appreciation potential.
After a long, dark period, there finally appear to be signs of light at the end of the tunnel for the housing market. Both existing and new home sales have been trending positively over the past few months and inventories have come down significantly. Potentially sparking the demand side of the equation is affordability, which in many markets is at the point in which owning a home costs less than renting. Finally, not to be underestimated is the potential for further governmental support. The Fed has made it clear that it believes that weakness in the housing market has blunted its monetary tools, and recently sent a letter in this regard to Congress, urging further action to be taken.
For these reasons and others, we have been taking positions in companies which we believe are levered to an improvement in the housing market. To be clear, we are not expecting a sharp near term rebound, and are not baking this type of rosy assumption into our analysis. We do however believe that the market is gaining traction, and investment opportunities abound should residential investment as a percentage of GDP even begin to approach prior trough levels.
Submitted by: Jason Sheer, CFA – Portfolio Manager
This information is intended solely to report on investment strategies and opportunities identified by Roosevelt. Opinions and estimates offered constitute our judgment and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. This material is not intended as an offer or solicitation to buy, hold or sell any financial instrument. References to specific securities and their issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Please contact us at 646-452-6700 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions, or if you would like to request a copy of our Code of Ethics. Our current disclosure statement is set forth on our Form ADV Part II, available for your review upon request, and on our website, www.rooseveltinvestments.com.
