U.S. Housing: Potential Opportunity Amid Cautious Economic Outlook

Even as the probability of a recession in the near-term remains low, we believe investors should look to sectors that are likely to be resilient in periods of higher volatility.

Even as the probability of a recession in the near-term remains low, we believe investors should look to sectors that are likely to be resilient in periods of higher volatility. One area in which we see a potential opportunity is U.S. housing, where fundamentals remain sound. Demand is outpacing supply, and it remains cheaper to buy a home than to rent one (see chart).

Furthermore, while recession risks have risen, we don’t see the same kind of imbalances in the real economy that we have seen in previous recessions: There is no over-borrowing, overconsumption or over-investment. Also, while the pace of home price gains is slowing and the pace of housing-related activity is slowing, valuations in the U.S. housing market look reasonably attractive.

As a result, we think this is a sector that will exhibit resiliency even if we were to get into a sustained period of weak economic growth or even a period of higher interest rates.

The figure shows a line graph of the buy-to-rent ratio from 1993 to 2019. The ratio as of 28 February 2019 was around 0.9, indicating buying is cheaper than renting. A solid horizontal line at 1.15 divides the “renting cheap” area above it with “buying cheap” below it. The ratio fluctuates between 0.9 and 1.4 from 1993 and 2005, then reaches as high as 1.7 in 2006, then starts a sharp downward trend, bottoming around 0.6 in 2012 and 0.5 in 2015.  class=

What it means for investors

With rising volatility and stretched valuations, we believe investors should emphasize flexibility and consider sectors like U.S. mortgages that have solid fundamentals and are less affected by swing factors like politics or trade.

For more insights into the factors that inform our favorable view of the housing market, watch “Quick Takes: Will Rising Rates Hurt the Housing Market?

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The Author

Daniel H. Hyman

Head of Agency MBS Portfolio Management

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All investments contain risk and may lose value. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee, there is no assurance that private guarantors will meet their obligations. Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.