Rising Mortgage Rates, Slowing Home Sales Don't Deter Fidelity's Nabar

July 10, 2018 — 11:22 AM EDT

Despite rising mortgage rates, a lack of homeownership on the part of millennials and increasing property values that are shutting some buyers out of the market, Fidelity Investments portfolio manager Neil Nabar is bullish on the outlook for the construction and housing markets.

In fact, the fund manager for the Fidelity Select Construction and Housing Portfolio is more bullish than he was this time a year ago, when the housing index saw a big surge. "The first half of 2018 was a little disappointing, with the construction housing index underperforming the S&P 500 and homebuilders down on average about 20%," Nabar said in an interview with Investopedia. "It was a knee-jerk reaction to higher interest rates and a potential recession. But it is our job to separate the signals from the noise."

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While many investors are running for the hills, betting that real estate sales will slow and further pressure homebuilders, Nabar pointed to single-family housing starts as an example of extracting important facts from the noise. He noted that, on an annualized basis, single-family housing starts are on pace to hit 950,000 per year, and over the longer term, they could be in the 1.2 million to 1.3 million range to keep up with population growth. Add what Nabar said is a "wave" of under-building for years to the mix, and the situation doesn't seem so bad for the construction and housing markets. A lack of supply isn't the only driver of new homes in the months and years to come. Nabar said that a strong labor market and the White House's immigration policies could also boost demand.

Millennials Are Getting Older

One of the concerns about the housing market is the idea that millennials are shunning homeownership as they pay down their college debt and move around more readily between jobs. That has led to worries that the real estate market won't see as much growth as in the past. But according to Nabar, millennials are growing up, with the oldest ones between the ages of 36 and 37 and with many in their late 20s. The late 20s happens to be around the time people start settling down, having kids and thus needing larger living quarters. "We have this potential wave of people about to have kids" at the same time that there is a shortage of affordable housing, which could prompt more construction, he said.

Mortgage Rates Still Historically Low   

As for mortgage rates, which have been marching higher this year, Nabar said that even a mid-4% rate on a 30-year fixed-rate mortgage is historically low. "A family earning the national median income has 160% of the income needed to qualify for a standard mortgage covering 80% of the purchase price, according to data from the National Association of Realtors," he said. "In other words, home affordability remains in very healthy territory."

As a result of Nabar's contrarian view on the construction and housing markets, he said that he is overweight homebuilders, with Lennar Corporation (LEN), Equity Residential (EQR) and AvalonBay Communities, Inc. (AVB) as top holdings. He's also betting that home improvement retailers will benefit from home repairs, counting The Home Depot, Inc. (HD)  and Lowe's Companies Inc. (LOW) as top holdings in the fund. "The fund is positioned that way because I don't see excesses of new construction," said Nabar. "It may be one of those things where history might not repeat itself. The last recession in the housing market was so deep; it's unlikely that particular confluence of circumstances can happen again."