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Growing demand strengthens housing market

"Following the overbuilding that occurred when the bubble was happening, there was a period when we needed to clear that excess inventory," said Mike Salm, Putnam's Co-Head of Fixed Income. "Today there is evidence of increasing demand pressure."

Evidence of increasing demand
Residential vacancy rates have dropped significantly, and home prices are higher.

Further evidence is a consistent rise in owners' equivalent rent. This is the amount of rent that could be paid to replace a house that is currently owned for an equivalent rental property. Part of the Consumer Price Index, the number is used to measure trends in shelter costs.

After a brief decline, residential rental costs have increased quickly

Debt levels improved
The mortgage market has also improved. Mortgage rates reached historic lows. As a result, the level of household debt service — the cost to finance that debt as a percentage of a household balance sheet — declined to levels not seen since the 1980s.

Also, foreclosure filings plunged 26% in 2013 from 2012, and are down 53% from their peak in 2010. At the same time, savings rates have risen.

Implications for equities
A sharp rise in interest rates will have an effect on both equity and fixed-income markets.

"Equity markets tend to perform well when short-term rates are rising from low levels because it is a sign of an improving economy," said Nick Thakore, Putnam's Co-Head of U.S. Equities. "As for the impact on the housing recovery, it is important to note that even if mortgage rates rise dramatically from current levels, housing affordability would still be above average by historical standards."

The views and opinions expressed are those of the speakers cited, are subject to change with market conditions, and are not meant as investment advice. All funds and investment products involve risk, and you can lose money. See the prospectus for details. Any economic and performance information is historical and not indicative of future results.

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