Pretium’s Housing Insights, January 2023

INSIGHTS

Pretium’s Housing Insights, January 2023

January 26, 2023

Summary

Increased long-distance migration persisted in 2022

The pandemic is likely to have a structural, long-term impact on housing demand

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.

Exhibit 1

Exhibit 2

 

Source: US Census, Population and Housing Unit Estimates, 2022 Vintage as of December 2022. Years are measured from July 1 to July 1. Top 5 states are Florida, Texas, North Carolina, South Carolina and Tennessee; Bottom 5 states are California, New York, Illinois, New Jersey and Massachusetts.

Want more Housing Insights from Pretium?: Expanding Build-to-Rent Construction Increases Housing Supply and Preserves Rental Access

Statements above regarding the housing market represent the opinions and beliefs of Pretium. There can be no assurance that these will materialize. This is not an offer, advertisement, or solicitation for interests in any Pretium managed vehicle and should not be construed or relied upon as investment advice or as predictive of future market or investment performance. Past performance is not indicative of future results.


1. Barrero, Bloom & Davis, “Why working from home will stick,” National Bureau of Economic Research Working Paper 28731. Data as of January 17, 2023.
2. US Census, Monthly Retail Trade Quarterly E-Commerce Report, Data as of November 18, 2022.
3. McKinsey & Company, “Still feeling good: The US wellness market continues to boom”, September 19, 2022. Placer.AI Quarterly Index – Q4 2022, January 2023.
4. US Census, Business Formation Statistics, Data as of January 17, 2023.
5. UBS, “UBS Evidence Lab inside: 4Q housing intentions remain resilient despite affordability headwinds”, January 5, 2023.
6. US Census, Population and Housing Unit Estimates, 2022 Vintage. Data as of December 2022.
7. Bloomberg, “Urban Migration Slows in 2022 for Many Major US Cities”, September 3, 2022.
8. Redfin, “Homebuyers Are Flocking To The Sun Belt, Attracted To Relatively Affordable Home Prices”, December 19, 2022.

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2021 Single-Family Rental Factsheet

2021 U.S. Housing Outlook

Pretium’s Housing Insights, December 2022

INSIGHTS

Pretium’s Housing Insights, December 2022

December 21, 2022

Summary


Expanding build-to-rent construction increases housing supply and preserves rental access

Build-to-rent typically produces smaller, more affordable homes that are in shortest supply

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. 

 

 


Source: US Census, American Housing Survey, 2021; Annual Characteristics of New Housing, 2021; Quarterly Starts and Completions
by Purpose and Design, as of 3Q22. % of Construction is calculated on a trailing 10-year basis as of 3Q22.

1. Whitney Airgood-Obrycki, “Suburban Status and Neighbourhood Change”, Urban Studies, November 2019.
2. Harvard Joint Center for Housing Studies, “Rental Deserts Perpetuate Socioeconomic and Racial Segregation”, August 4, 2022.
3. “Investor activity in housing had no discernible impact on homeownership during the pandemic”, Pretium Housing Insights, October 2022.
4. John Burns Real Estate Consulting, “The Light: Now Tracking $50+ Billion of Capital Flooding SFR and BTR Sector”, January 28, 2022.
5. John Burns Real Estate Consulting, “3Q22 Residential Land Survey”, October 26, 2022.
6. US Census, Quarterly Starts and Completions by Purpose and Design, as of 3Q22.

This is not an offer, advertisement, or solicitation for interests in any Pretium managed vehicle and should not be construed or relied upon as
investment advice or as predictive of future market or investment performance. Past performance is not indicative of future results.

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The Strategic Case for CLOs vs. High Yield Corporate Bonds

INSIGHTS

CLO Performance Report, December 2022

December 8, 2022

Summary


BB CLOs earn a persistent yield premium – currently over 6% - relative to corporate bonds of equal risk

Pretium believes that most investors who are allocating to high yield corporate bonds should also be considering bonds from the collateralized loan obligation (CLO) sector as well. Per Exhibit 1 below, BB rated CLO bonds have market yields of 13.9% as of November 22, 2022, vs. an average 7.2% yield for BB corporate bonds. Exhibit 2 shows that the extra yield that CLOs earn vs. corporate bonds, the CLO’s “complexity premium”, has grown in recent months, a trend that, we think, has improved the long-run value proposition associated with CLO debt. This yield premium reflects index, or average returns – i.e., “beta”. Industry researchers appear to share the view that CLOs can offer value, as highlighted by the quotations below:

  • Morgan Stanley: “…we believe that the CLO market has more than priced in the downside risks, providing a large margin of safety and attractive risk-reward profile in the debt stack.”1
  • Bank of America: “We continue to see good value in securitized products credit relative to corporate credit, notably in credit risk transfer and CLOs.”2

This is not an offer, advertisement, or solicitation for interests in any Pretium managed vehicle and should not be construed or relied upon as investment advice or as predictive of future market or investment performance. Past performance is not indicative of future results.

While CLOs offer higher yields vs. corporate bonds, a Federal Reserve Bank of Philadelphia study shows that CLO bond instruments have historically had lower default rates compared with the default rates on similarly rated corporate bonds.4 CLOs are backed by senior secured bank loans to corporations, which typically offer higher recovery rates compared with unsecured corporate bonds5; this relatively high collateral quality has helped to limit losses for CLO bond investors. 

CLOs don’t require investors to make material bets on the direction of interest rates

The floating rate nature of CLO bonds tends to reduce risks to investors in high inflation, rising interest rate environments. The BBB rated corporate bond index has suffered a 17% loss in 2022 year-to-date through November 18, 2022; by contrast, the BBB rated CLO index has experienced just a 5% loss, reflecting the relatively lower sensitivity of CLOs to interest rate market drivers including inflation and Federal Reserve policy shifts.6

The CLO asset class has become too large to ignore

CLOs have become a large asset class; in part because of the strong and stable historical performance of the sector, the US CLO market has grown so that over 65% of the $1.4 trillion of leveraged loan debt outstanding is now owned within CLO vehicles.7 Reflecting the growth and maturation of the CLO asset class, a broad range of financial institutions – including banks, insurance companies, mutual funds, pension funds, private equity funds, private credit funds, and hedge funds – are now investing in CLOs.

Why do CLOs earn higher yields than comparably rated corporate bonds?

There are a few possible explanations for why bonds from the CLO sector consistently tend to earn higher yields in comparison with fixed rate corporate bonds. For one, while CLO liquidity has increased over time as the sector has grown, the bonds are not yet quite as liquid as generic corporate bonds. Second, CLO bond cashflows are determined by the performance of a pool of underlying loan assets, and so there may be a complexity premium vs. fixed rate bonds, which are simpler instruments with cashflows driven by a single underlying reference credit. Finally, we think the premium associated with CLOs in part reflects broad underinvestment in the sector, due to investor concerns that CLOs were connected to the problems associated with the global financial crisis. These concerns are, we think, misplaced; while CDO, RMBS and CMBS instruments indeed suffered high default rates in the 2007-2014 period, CLO structures performed far better, with low default rates and high realized returns.8 

In light of the current high yields offered by CLO debt instruments, and the relative return stability of CLOs in periods of volatile interest rates, we think incorporating CLO debt can improve the risk/return profiles of many investors’ portfolios.


1. Source: Morgan Stanley, 2023 US CLO Outlook: Margin of Safety, November 2022.
2. Source: Bank of America, Securitization Weekly, November 4, 2022.
3. Source: Bloomberg, BCBAYW BB Corporate Bond Index and Palmer Square PCLOBBY BB CLO Index, Pretium internal analysis; as of November 22, 2022.
4. Source: “CLO Performance”, Federal Reserve Bank of Philadelphia Working Paper No. 20-48, November 2021, Table 7: Default Rates for CLO Tranches and Corporate Bonds.
5. Source: “Annual default study: After a sharp decline in 2021, defaults will rise modestly this year”, Moody’s, Exhibit 6, February 2022.
6. Source: Bloomberg, LCB1TRUU BBB Corporate Bond Index and Palmer Square PCLOBBBT BBB CLO Index, Pretium internal analysis; as of November 18, 2022.
7. Source: BoA, US CLO Outstanding by Rating, as of November 23, 2022.
8. Source: CLO Performance Report, November 2022, Pretium Partners: https://pretium.com/clo-performance-report.
9. Source: Bloomberg, BCBAYW BB Corporate Bond Index and Palmer Square PCLOBBY BB CLO Index, Pretium internal analysis; as of November 22, 2022.
10. Source: Pretium calculation – BB annual yield compounded over a 5-year period.
11. Source: Bloomberg, BCBATRUU BB Corporate Bond Index and Palmer Square PCLOBBTR BB CLO Index, Pretium internal analysis; as of November 23, 2022.
12. Source: BofA CLO Factbook, Bloomberg LF98TRUU High Yield Corporate Bond Index, Pretium internal analysis; as of November 23, 2022.

Pretium’s Housing Insights, November 2022

INSIGHTS

Pretium’s Housing Insights, November 2022

November 30, 2022

Summary


The US is already underbuilding housing again, worsening the long-term supply shortage

Single-family housing construction has fallen meaningfully below long-term averages1

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. 

 

Starts represent ground-breaking for new homes and provide the longest time series for analyzing levels of construction. As shown in Exhibit 2, the average level of single-family starts since 1959 has been 1.02 mm. October’s single-family starts pace of 0.86 mm is 16% below this long-term average and consensus forecasts project construction levels to continue to decline in 2023. For example, Fannie Mae forecasts that single-family starts will decrease to 0.79 mm in 2023. Multifamily starts remain above their long-term average, but the decrease in single-family activity has been significant enough to drive overall housing starts below their long-term averages. If housing starts begin to recover in 2024 at the same roughly 6% annual growth rate the market experienced from 2013-19, it could take until 2027 for total housing starts to again exceed their long-term averages. This would result in a 20-year period from 2007-2026 where total housing starts only exceeded their long-term average for two years during the pandemic. 


1. Source: US Census, New Residential Construction, as of October 1, 2022; Fannie Mae Housing Forecast, as of October 10, 2022. 

This is not an offer, advertisement, or solicitation for interests in any Pretium managed vehicle and should not be construed or relied upon as investment advice or as predictive of future market or investment performance. Past performance is not indicative of future results.

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CLO Equity Delivered Strong Returns Through the Financial Crisis Period

INSIGHTS

CLO Performance Report, November 2022

November 10, 2022

Summary


CLO equity delivered strong returns through the financial crisis period

During the Global Financial Crisis (GFC) episode, default rates on the bonds issued by collateralized loan obligations, or CLOs, were far lower than those for other structured credit products such as CDOs, RMBS, CMBS, and ABS. Legacy structured finance CDOs (SF CDOs) and subprime RMBS had average annualized impairment rates of 24.1% and 10.0% respectively, vs. just 0.2% for CLO debt tranches (Exhibit 1). CLO equity tranches also performed well through the GFC. A study by researchers at the Federal Reserve Bank of Philadelphia finds that the median CLO equity tranches issued during 2005-2007 earned 13%-18% lifetime IRRs (Exhibit 2). In contrast, most of the equity and debt securities from RMBS, CMBS, and CDO transactions from the same period experienced negative returns.

How were CLOs able to avoid the distress experienced by so many seemingly similar sectors during the financial crisis? We highlight three factors that contributed to the success of CLO equity and that differentiated CLOs relative to other structured finance asset classes of this era:

  • Long-term funding: CLO equity tranches achieve leverage via long-term funding at fixed credit spreads. As a result, CLO managers were not forced to sell loan assets in the periods of deep market distress experienced during the GFC. By contrast, structures that relied on shorter term funding instruments (e.g., repo financing) faced margin calls and thus were forced to sell assets at distressed prices, eroding returns.

  • Benefits of senior-secured corporate lending: The business loans that back CLOs are senior in the issuers’ capital structures and are typically secured by real estate or other corporate assets. As a result, the recovery rates on loans have historically been much higher than for high yield corporate bonds, say, which are typically junior and unsecured. The high recovery rates on defaulted CLO loan assets in turn helped to limit the losses experienced by CLO equity and debt investors during the financial crisis period.

  • Industry diversification: CLO collateral pools are highly diversified across industry sectors. Most prospectuses limit the fraction of total pool balance that can be allocated to any one sector or obligor. By contrast, many other structured finance products were backed by highly similar assets (such as mezzanine subprime RMBS bond tranches in the case of CDOs)1, which all defaulted at the same time when US real estate prices declined and mortgage foreclosure rates rose.

We believe that the factors above which contributed to solid CLO equity returns during the financial crisis period continue to be broadly relevant going forward. While past performance is never a guarantee of future returns, the resilience shown by CLO equity through the historically extreme global financial crisis scenario helps contribute to confidence that the strategy can offer positive returns even if, as we expect, economic volatility remains elevated over the medium-term horizon.


1. “Collateral Damage: Sizing and Assessing the Subprime CDO Crisis”, Federal Reserve Bank of Philadelphia Working Paper No. 11-30/R.

Pretium’s Housing Insights, October 2022

INSIGHTS

Pretium’s Housing Insights, October 2022

October 26, 2022

Summary


Investor activity in housing had no discernible impact on homeownership during the pandemic

The stock of single-family rental housing has been falling in recent years

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.

The narrative about investor activity and homeownership largely rests on new data released during the pandemic that portrays record levels of investor buying in 2021; however, this data is far from conclusive. It is directly contradicted by other analyses that show investor buying was at historically normal levels during the pandemic and in fact has been falling in recent years. Even if investor buying trends could be accurately captured, it would only tell half the story. It is equally as important to consider investor sales – a recent study found the smaller investors sold 50% more homes in 2021 than they bought. Since smaller investors hold roughly 97% of single-family rental homes, this helps to explain why single-family rentals fell as a share of the overall housing stock during the pandemic.

If anything, the data argues that more investment in single-family rental housing is needed. The Harvard Joint Center for Housing Studies recently found that rental housing options are most lacking in suburban, single-family neighborhoods. Not only will increased investment in single-family rentals broaden access to the opportunities that high quality single-family housing brings for its residents; but also, increased investment is necessary to resolve US housing’s overall supply shortage.


1. Redfin and CoreLogic Investor Buying Analyses, both as of August 2022..
2. National Association of Realtors, “Impact of Institutional Buying on Home Sales and Single-Family Rentals”, May 2022; Freddie Mac, “What Drove Home Price Growth and Can It Continue?”, June 9, 2022.
3. CoreLogic, “Small Investors Chose to Sell Properties Rather than Rent Them During the Pandemic”, September 5, 2022.
4. Pretium calculations based on John Burns Real Estate Consulting Single-Family Rental Properties by Large Operator data, retrieved October 2022 and US Census, American Community Survey 1-Year Estimates, 2021.
5. Harvard JCHS, “Rental Deserts Perpetuate Socioeconomic and Racial Segregation”, August 4, 2022.

This is not an offer, advertisement, or solicitation for interests in any Pretium managed vehicle and should not be construed or relied upon as investment advice or as predictive of future market or investment performance. Past performance is not indicative of future results.

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Key Takeaways from Pretium’s 2022 Investor Symposium

INSIGHTS

Pretium Investor Symposium

September 13-14, 2022

This September, we hosted nearly 300 investors at our 2022 Investor Symposium in New York City. Leading experts in real estate, residential debt, and credit discussed industry trends as well as the global economic landscape. The headline: there are a number of forces at play in the global real estate and credit markets that are relevant to investors now and as we head into 2023.

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.

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Pretium’s Housing Insights, September 2022

INSIGHTS

Pretium’s Housing Insights, September 2022

September 21, 2022

Summary

In forecasting home prices, the last housing cycle is a poor guide for this one

The post-pandemic demand and supply backdrop has strong and stable underpinnings

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 strong demand backdrop for housing is most clearly illustrated by the increase in rents alongside home prices the past few years, as shown in Exhibit 1. Both single-family and multifamily rents grew at a double-digit pace and are up more than 20% in the two years ending June 2022.1 This compares to the roughly 7% increase that rents experienced during 2004-05 period. Easing mortgage lending standards amplified housing demand mostly in the purchase market during the mid-2000s whereas mortgage lending standards tightened during the pandemic. Rental markets don’t experience speculative excess as the home purchase market does, so the meaningful increase in rents during the pandemic argues that housing demand is well-grounded fundamentally. Pretium believes that the pandemic structurally increased housing demand as reflected in trends such as work-from-home, increased migration and greater consumer prioritization of space & wellbeing. Exhibit 2 illustrates the strong relationship between home prices and months supply of resale inventories. The historically low levels of resale inventories during the pandemic (more than two-thirds below pre-pandemic levels) anchored home price growth. For sustained home price pressure to emerge in the post-pandemic period, inventory levels would have to increase substantially from current levels as they did in 2006-07. This seems unlikely given low levels of mortgage distress, a reluctance by existing homeowners to give up their low fixed rate mortgages, aging-in-place and long-term underbuilding since the last cycle. These factors appear to have already begun to limit inventory growth even as the housing market transitions – in recent weeks, the volume of new resale listings has fallen 15-20% below pandemic levels and overall resale inventory levels have begun to flatten. 2

Exhibit 1

Exhibit 2

New and Existing Home Inventory Month's Supply

Source: CoreLogic Single-Family Rent, S&P Case-Shiller and Home Price Indices, all as of September 2022; RealPage Axiometrics Quarterly Market Performance Trend, as of September 2022; National Association of Realtors Existing-Home Sales retrieved via Bloomberg, as of September 2022.

This is not an offer, advertisement, or solicitation for interests in any Pretium managed vehicle and should not be construed or relied upon as investment advice or as predictive of future market or investment performance. Past performance is not indicative of future results.


1. CoreLogic Single-Family Rent Index, RealPage Axiometrics Quarterly Market Performance Trend, both as of September 2022.
2. Redfin Weekly Housing Market Data, as of September 4, 2022.

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Pretium’s Housing Insights, August 2022

INSIGHTS

Pretium’s Housing Insights, August 2022

August 15, 2022

Summary

Housing’s slowdown is likely to be felt more acutely in the new home market vs. the resale market

Pandemic supply chain issues increase inventory risk in the new home market

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.

Exhibit 1

New and Existing Home Inventories

EXHIBIT 2

New and Existing Home Inventory Month's Supply Source: National Association of Realtors, Existing Home Sales as of July 20th, 2022; US Census, New Residential Sales as of June 2022.

These materials do not constitute, or form part of, any offer to sell or issue interests in an investment vehicle or any other entity managed by Pretium Partners, LLC or its affiliates (collectively, “Pretium”). Any such offer or solicitation will be made solely by means of a definitive offering document, which will describe the actual terms of any securities offered and will contain material information regarding the securities. Certain information contained in this presentation has been obtained from published and non-published sources prepared by third parties, which, in certain cases, have not been updated through the date hereof. While such information is believed to be reliable, Pretium has not independently verified such information nor does it assume any responsibility for the accuracy or completeness of such information. Except as otherwise indicated herein, the information, opinions and estimates provided in this presentation are based on matters and information as they exist as of the date these materials have been prepared and not as of any future date, and will not be updated or otherwise revised to reflect information that is subsequently discovered or available, or for changes in circumstances occurring after the date hereof.


1. Redfin, Weekly Housing Data as of July 24th, 2022, US Census, New Residential Sales as of June 2022.
2. AEI Housing Center, Housing Finance Watch as of August 9th, 2022, John Burns Consulting, Home Builder Survey as of August 4th, 2022.
3. Pretium’s Housing Insights as of April 2022

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