One of the most important debates about the pandemic’s impact on the housing market is whether the surge in demand that began in mid-2020 is a temporary or structural phenomenon. There are numerous indicators of structural pandemic driven changes in household behavior, including the persistence of work-from-home,¹ increased online shopping,² a greater focus on wellness,³ and elevated business formations.⁴ However, many investors still question whether the pandemic simply pulled forward housing demand, especially since rising rates have obscured underlying trends. Consumer surveys find that households continue to expect the pandemic to have a permanent impact on their housing choices.⁵ Also, recently released data from the Census indicates that the pandemic boost to long distance migration accelerated well into 2022 even as many other aspects of life returned to prepandemic patterns.⁶ The Census data is notable because it is a direct measurement of long-distance migration whereas indirect measurements of migration such as postal change of address forms had indicated that migration slowed during 2022.⁷

As shown in Exhibit 1, interstate migration increased meaningfully in the year ending July 1, 2021 – the first year of the pandemic. If the pandemic’s impact on housing demand was mainly temporary in nature, migration levels should have slowed in the second year of the pandemic as its impact on day-today life waned. Instead, interstate migration increased further in the year ending July 1, 2022 to 1.5x pre-pandemic levels. As shown in Exhibit 2, the increase in migration was a combination of larger outflows from states such as California and New York as well as larger inflows into states such as Florida and Texas. Migration levels are likely to decrease as higher mortgage rates and a slowing economy limit households’ financial ability to move; however, online home search activity indicates that the desire to move to a different metro continued to increase in 2H22.⁸ Pretium believes that migration data demonstrates the likely structural impact of the pandemic on long-term housing demand and that this increased demand should become apparent again as economic and rate pressures ease.

Pretium believes single-family rentals are an essential part of the US housing landscape because they provide access to suburban neighborhoods where opportunities and amenities for residents have historically been most abundant.¹ Unfortunately, the housing market has over time struggled to create enough rentals in single-family neighborhoods. Recent research by Harvard’s Joint Center for Housing Studies finds that rental deserts — neighborhoods with the fewest rental options — tend to be disproportionately found in suburban locations.² We believe the primary driver of the shortfall of single-family rental options is that relatively few single-family homes have historically been built as rentals. As shown in Exhibit 1, over the past 10 years only 5% of single-family homes were built as rentals — a much smaller proportion than the 18% of existing single-family homes that serve as rentals. The burden to create single-family rentals thus falls on investors purchasing existing homes; however, as described in Pretium’s October Housing Insights the stock of single-family rentals fell during the pandemic despite increased investor activity.³ Build-to-rent capital flows have increased in recent years⁴ and residential land surveys show increased activity in the build-to-rent sector⁵, but even with this increased activity the percent of homes built for rent in the four quarters ending 3Q22 was just 6%.⁶ Overall, the data suggests that there is considerable scope to increase investment in the build-to-rent sector. Not only would this investment broaden access to single-family rentals; but also, it would help to alleviate the long-term housing supply shortage that has worsened housing affordability. 

Growth in the build-to-rent sector would be particularly beneficial in terms of creating new housing supply because the sector has consistently built smaller, more affordable units compared to homes that are built for sale/ownership. As shown in Exhibit 2, the existing stock of single-family rentals is both older and smaller than the existing stock of owned homes. Importantly, homes built for rent in 2021 remain similar in size to existing singlefamily rentals at just over 1,500 sq. ft. By contrast, homes built for sale have become progressively larger over time to the extent that recently built homes for sale are 17% larger than existing owned homes. In other words, even as worsening supply constraints over time have prompted homebuilders to build larger homes for sale, the build-to-rent sector has maintained its focus on creating the affordable home supply that is in greatest need. 

Rising rates have achieved the Federal Reserve’s intended effect of dampening housing demand and bringing down the rate of home price and rent growth. But increased demand was just one side of a historic supply-demand imbalance that drove rapid home price and rent growth during the pandemic. The other side was years of underproduction leading up to the pandemic, especially of single-family homes. The Fed induced rate shock may have brought housing supply & demand back into balance; however, it has also prompted builders and developers to sharply reduce rates of construction, particularly of single-family homes. Consensus forecasts call for rates of construction to continue to decline into 2023, which means the pandemic construction surge lasted less than two years. This wasn’t enough to address housing’s pre-pandemic housing shortage, let alone a post-pandemic housing market that could feature structurally higher levels of demand driven by factors such as hybrid work, increased migration, and an increased focus on the home. Longer-term, Pretium expects that the housing supply shortage is likely to remain a central driver of US housing market dynamics and that this supply shortage will be more pronounced for single-family vs. multifamily homes. 

Permits are the first step in the construction process and monthly permits trends provide an early gauge of overall housing construction levels. In October, US housing permits are down nearly 20% from their early 2022 peaks. As shown in Exhibit 1 this decline is almost entirely driven by declining single-family permits that are down roughly 30%; by contrast, multifamily activity is down just 5%. Single-family permits fell below the rate of single-family completions in June, so homebuilder construction backlogs have been declining since then. On the other hand, multifamily permits remain well above multifamily completions and construction backlogs are still increasing. In the near-term single-family homebuilders have curtailed production more sharply than multifamily developers because of the sensitivity of home purchase demand to rising mortgage rates; over the longer-term, Pretium believes that land and housing supply constraints are also more acutely felt in the single-family market. 

One of the more persistent housing narratives to emerge during the pandemic is that a dramatic increase in investor activity has limited the ability of aspiring homeowners to purchase single-family homes. As widespread as this narrative is, it doesn’t stand up to basic scrutiny. The US homeownership rate rose through the pandemic at the same trajectory it was rising pre-pandemic (Exhibit 1). As of 2Q22, the homeownership rate reached 65.8%, up 170 bps from 2Q19 and above the long-term average of 65.2%. If investor activity has been crowding out individual home purchases the homeownership rate would have at best been flat or potentially declining.

Also, recently released data from the Census indicates that the total stock of single-family rental units fell by more than 100,000 to 14.3 mm in 2021 from 2019; by contrast, the stock of single-family owned homes increased by 4.5 mm during the same period (Exhibit 2). In the single-family market investor activity during the pandemic appears to have created no impediment for owner-occupiers. In 2022, investor activity in the housing market has slowed along with the purchase market and in the coming years we would expect it to continue to have little to no impact on owner-occupier trends.

A Rising Rate Environment

Perhaps the most salient of these forces is rising interest rates. The scale and speed of the Federal Reserve’s rate increases have pushed up U.S. mortgage rates, leading to an expected deceleration in home prices, with prices in some markets already flattening or beginning to fall. Apart from the impact of rate increases, housing market fundamentals in the U.S. remain strong, with persistent outsized demand, limited supply, strong credit quality, rental growth, and record levels of home equity.

In fact, the $28 trillion in existing home equity in the U.S. is the largest such buildup in the last 40 years. This is expected to mitigate the risk of forced selling and thus support stable home values, unlike what was experienced during the global financial crisis of 2008.

Disruption is also occurring at the mortgage company operating level. During this period of dislocation, mortgage-company stocks are significantly down, and spreads on loans have widened. Once the Fed-induced volatility in rates markets subsides, however, mortgage spreads and lending conditions should normalize.

The Ongoing Growth of Rentals

Opportunities are likely to emerge in real estate and specifically single-family rentals (SFR) as the housing market adjusts to the rising rate environment. SFR yields should rise as rent growth outpaces home price appreciation, which is more affected by Fed tightening. This would represent a reversal of cycle-to-date trends. Build-to-rent (BTR) is also likely to see compelling opportunities emerge as US homebuilders act to reduce unsold inventory backlogs that grew at a faster than normal pace due to pandemic supply-chain disruptions. Even with higher-than-normal builder inventories, single-family housing’s overall supply-demand imbalance persists and should remain an important dynamic in the post-pandemic housing market. Single-family construction has once again fallen below long-term averages; meanwhile, the pandemic has unleashed a long-term structural increase in demand for single-family housing driven by phenomenon such as work-from-home and increased migration. These factors point to SFR as an investment opportunity—and at an attractive entry point.

The Residential Credit Investing Landscape

Strong fundamental loan performance driven by substantial home equity and strong lending standards continues to provide good support for the Residential Credit market.  Investment opportunities remain strong in nonperforming loans, subordinate bonds, nonagency origination, and mortgage servicing rights.  Disruption from higher rates and wider spreads is reducing competition in the nonagency mortgage origination space and will reward vertically integrated platforms.  The aging housing stock will continue to drive the need for residential credit transition loans to sophisticated operators.

Opportunities in Structured Credit

Investors continue to see opportunities in structured credit, as the market has transitioned from a niche to a strategic/core asset class capable of generating double-digit returns. As panelists emphasized, collateralized loan obligations (CLOs) now represent a trillion-dollar market that represents 40% of high-yield corporate debt markets.  CLO issuance is set to experience the second-highest issuance year on record despite a worsening arbitrage environment as investors seek leveraged exposure to a recovery scenario.

During periods of volatility and price dislocation, participants increasingly pivot to secondary markets. The volatility and dislocation are expected to continue, which broadens the opportunity set for credit investment in the next 12 months. Many are relying on defensively positioned portfolios with longer reinvestment periods to maintain dividends through a recession while providing freedom to opportunistically build par and excess spread when market conditions allow.

A Boost from Technology

Technology was another key theme of the symposium. Not only does it allow managers to make more informed, data-driven decisions, but it also is enabling change at the operational level.  Technology helps attract and retain residents while fostering transparency in vendor services. A customer-first mindset and continuous tech improvements in SFR, for example, are mobilizing resources in real-time, giving a boost to resident experiences and ultimately investor returns. As smart homes and home services become more accessible, panelists predicted that innovations, such as “homes as software,” will provide more predictable and controlled living experiences. Meanwhile, as the digital economy expands and the value of technology appreciates, intellectual property (IP) assets have grown in importance, creating investment opportunities in the data and privacy litigation space.

Don’t Wait for Market Clarity

Though the markets are currently volatile, participants are not waiting around for them to calm. Instead, they’re staying nimble and seizing opportunities in the market disruption. As the symposium revealed, there are many investment opportunities to be uncovered, but working with a well-established, vertically integrated asset manager is key to accessing value.

As we celebrate our 10th Anniversary, the valuable insights gained within the context of our global market trajectory make it clear that Pretium is well positioned for the future across all our strategies.

As the US housing market transitions to its post-pandemic phase, it faces major headwinds including a historically rapid increase in mortgage rates. With negative headlines growing and memories of the Great Financial Crisis still fresh in investors’ minds, fears of a major home price correction have grown. In comparing this cycle to the last, Pretium believes that housing’s risk profile is dramatically different in 2022 than it was in 2006. The risk to home prices was underappreciated by many investors in 2006 because home prices hadn’t seen a significant national decline since the Great Depression; conversely, the current perceived risk to home prices may be overstated because home prices experienced a major correction just 10 years ago. Fundamentals matter, and the demand and supply backdrop for the post-pandemic period is solidly grounded especially relative to the mid-2000s housing boom. Looking ahead, the supply-demand imbalance that propelled housing during the pandemic is stil likely to remain an important dynamic in the post-pandemic housing market. While home prices may not emerge unscathed from adverse economic scenarios, Pretium expects downside risk to be limited compared to the last cycle. Overall, housing’s unresolved supply-demand imbalance underpins a favorable risk-reward profile for residential housing investment, particularly for single-family rental homes.

The increase in mortgage rates by more than 200 bps during 2022 has begun to achieve the Federal Reserve’s desired goal of slowing home purchase demand. In recent weeks, pending sales of existing homes have fallen back to 2019 levels and sales volumes in the new home market as of June have fallen to pre-pandemic levels.1 While home price momentum has also slowed across both markets, it has been felt more acutely in the new home market than in the resale market. While data from mortgage rate locks indicates a still-above average pace of resale home price gains, builder surveys show there are already more builders cutting prices than raising them.2 While it is normal for the new home market to adjust more quickly than the resale market during periods of changing demand, Pretium believes the paths of the new home and resale markets could diverge to a greater extent this cycle due to differences in inventory risk.

At the start of the pandemic, factors such as cumulative underbuilding, aging-in-place3, and lengthening homeowner tenures contributed to historically low existing home listings, as shown in Exhibit 1. The pandemic housing demand surge further depleted existing home supply until it began to recover this year due to slowing demand. New home inventory sat at normal levels by historical standards in the beginning of 2020 before declining in the early months of the pandemic as demand grew. However, supply chain constraints limited builders’ ability to respond to this increasing demand. As construction cycles lengthened and labor/materials became more difficult to source, builder inventories of incomplete homes rose rapidly. The unusual divergence this cycle between inventory levels of existing homes and new home markets is best illustrated by looking at months’ supply, as shown in Exhibit 2, which highlights how the inventory paths of the resale and new home markets began to separate in 2015, and how the pandemic widened the gap meaningfully.

This divergence suggests that the risk to resale home prices should remain less than the risk to new home pricing. Pretium does not expect overall resale home price declines, even in a moderate recession scenario. In the new home market, completions are likely to increase over the next 6-12 months with increasing pressure on builders to sell into a slowing market. As a result, Pretium expects compelling opportunities to acquire in the build-to-rent sector.