After years of dragging down growth, the U.S. real estate sector added to U.S. GDP last year for the first time since 2005. Is the housing recovery here to stay? What does that mean for the economy? Paul Chew, Head of Investments at Brown Advisory discusses

“The collapse of the U.S. real estate market was the catalyst of the global financial crisis of 2008 – 2009, that brought capital markets to their knees and consigned Wall Street stalwarts like Bear Stearns and Lehman Brothers to the history books.
“Collateral damage in the U.S. was severe: 2.2 million construction jobs lost, $7 trillion of value in home equity destroyed, and 18 years of gains in median household net worth wiped out.

“In 2008, with high unemployment and tightened standards for mortgage lending, prospects for a housing recovery were bleak but by mid-2011, we began to see both construction activity picking up and house prices bouncing back.

“We believe that non-cyclical factors are driving the recovery, which suggests the upturn is more than a temporary blip. The Federal Reserve has consistently maintained a low interest rate environment to entice consumers and corporations to borrow money and if banks continue to normalise their lending standards, we believe that loan volumes will stay on an upward trajectory.

“Simple population pressure is also driving the recovery, with 1.1 million new households formed every year in the U.S.

“Long-term improvement in the housing market opens up a number of attractive investment possibilities across multiple sectors and asset classes. The most obvious might appear to be stocks in the homebuilding industry but it is highly cyclical and inherently involves a good deal of leverage.

“An improving housing sector has the potential to affect far more than just homebuilding stocks and we look to companies positioned to benefit from volume growth in the real estate sector, such as regional banks.

“Good news in the housing market does give a boost to the U.S. economy. However, investors should not expect that stronger real estate prices alone can drive U.S. economic growth back to pre-crisis levels. Housing and related sectors only accounted for 17% of GDP in 2005 and today an even smaller 13% of the total.”