Issue 28: 2014

Beyond the Headlines


An interview with DeAnne Steele.

Photograph by Andy Ryan

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In this interview, DeAnne Steele, investment executive for the western United States at U.S. Trust, focuses on housing — sorting through the various statistics and how U.S. Trust’s investment professionals incorporate them into their analyses and investment decisions.

Each month, so many statistics are released about housing — housing starts, new home sales, existing home sales, mortgage applications and so on.

What does U.S. Trust watch most closely?

The key to interpreting any economic indicator and to smoothing out the noise is to look at the overall trend rather than just one particular month. Housing in shorter time periods can be affected by shorter-term events, such as weather, as we saw with last winter’s storms, and by sudden interest rate increases. So, we look at trends across all the data. For example, a useful indicator would be the six-month average level of housing starts compared with the six-month average one year ago. They averaged 997,000 in the latest six months, which when compared with 895,000 a year ago, shows a gain of 11.3%.1

Given what you are seeing, do you expect
to see growth continue?

We expect housing starts to continue to grow at roughly a 10% rate. This estimate factors in the supply-and-demand dynamics, which are overall positive, that we are seeing across the United States today.

What about supply? Are there still too many homes
out there relative to demand? What about foreclosures?

Inventories of homes in foreclosure have come down and are likely to continue to be released gradually, so distressed properties flowing into the market are unlikely to provide much of a boost to inventories of listed homes available for sale. Across the country, distressed sales continue to decline as a percentage of overall sales. Inventories of listed homes as measured by the month’s supply are back below a six-month average, which is closer to where they were during the 1990s and early 2000s. In this environment, you would expect home builders to build more, but they have faced challenges finding finished lots and skilled labor.

We expect demand to continue to strengthen and supply to remain low. And we anticipate approximately 10% growth in housing starts over the next few years as demand continues to outstrip supply. The benefit of a slower recovery should be a longer one.

Should we be worried that some consumers, such as millennials,
are growing hesitant to increase their debt loads?

Should we be worried? No. Should these concerns be factored into our forecast? Yes, absolutely. Without these concerns, we think the market would be growing more quickly, because demand is there. Housing demand is determined by the confidence and ability of the buyer to make that kind of financial commitment. Confidence comes from feeling like you can make the mortgage payments, thinking your job is stable and your income is rising. We are seeing strong job growth, with the unemployment rate falling below 6%, while wages and hours worked are continuing to grow.2 More people are working, layoffs are less frequent and, therefore, potential buyers are more likely to invest in a home.

Also, there is some pent-up demand. In the United States, we form approximately 1 million new households per year, but during the Great Recession household formation fell, in part because many graduates chose to move back into their parents’ homes rather than rent or buy their own. We expect some of that diminished demand to come back into the market as confidence improves further. Demand benefits from affordability. Housing affordability has fallen from its peak, but it is still within the high range seen since 2008.


Home price expectations also help drive demand. If a buyer sees that prices are increasing and they have the confidence that this will continue, they are more likely to buy sooner rather than later. Prices have continued to rise over the last two to three years. Again, it is important to look at the trend. Although home prices are rising, at this point they look fairly valued relative to incomes and rents.

What about rising rates?

We do not expect rates to rise dramatically, and we think mortgages will remain affordable — but it’s still much more difficult to get a mortgage today than it was in 2007. Home loans require down payments and also strong credit scores, factors that limit buyers seeking mortgages. Also, those graduating from college have greater debt than ever before, with overall student loan debt almost doubling from $611 billion in 2008 to approximately $1.1 trillion today.3 Due to this, and to the experience of the Great Recession, millennials are averse to taking on more credit card debt, auto loans and mortgage debt. These factors should reduce the growth rate, not eliminate growth.

1Census Bureau; National Association of Realtors. Data as of September 2014.

2Bureau of Labor Statistics data for September and October 2014.

3Federal Reserve Bank of New York. Data as of May 2014.


Investing involves risk. There is always the potential of losing money when you invest in securities.

Projections made may not come to pass due to market conditions and fluctuations.

Past performance is no guarantee of future results.

Always consult with your independent attorney, tax advisor, investment manager and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.


Real Estate Investment Trusts (”REITs”) involve a significant degree of risk and should be regarded as speculative. They are only made available to qualified investors under the terms of a private offering memorandum. Holdings in a REIT may be highly leveraged and, therefore, more sensitive to adverse business or financial developments. REITs are long term and unlikely to produce a realized return for investors for a number of years. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties, such as rental defaults.