Steady as She Goes as Housing Continues Recovery

By TJ Kim – Bondsquawk

October 12, 2012

The U.S. housing market is beginning to show signs of improvement in recent months which many believe to be the start of a prolonged recovery. The improved prospects of the sector are supported by many conditions such as strong rental markets, single and multifamily start activities, and price appreciation.

The Cross Asset Research team of Vincent Foley, Michael Gapen, and Cedric Morris from Barclays wrote in More Light, Less Tunnel Part III: Key Themes for 3Q,

“At 221,000 units (3mma, saar), multi-family starts have more than doubled over the past two years (Figure 1). The pace of increase in multi-family starts, however, has slowed slightly as the start activity remains in line with the Q1 and Q2 averages of 227,000 and 220,000, respectively. Multi-family permit activity suggests that the levelling out of multi- family starts in recent months should be short-lived. Multi-family permits have remained on a solid upward trend, reaching 287,000 (3mma, saar) in August, above the 255,000 average in Q1 and 270,000 average for Q2. Hence, we look for multi-family starts to move higher in coming quarters so long as the trends in permit activity remain in place.”

Along with strong sales in multi-family houses, single-family homes are expected by many homebuilders to sustain its current strength in sales. Thus, on the supply side of the market, homebuilders are more optimistic about the market prospect.

“The National Association of Home Builders Housing Market (NAHB) Index has risen from 13 in mid-2011 to 40 in September 2012. This is the first reading of 40 or above on homebuilder sentiment since June 2006. Homebuilders have signalled that they expect single-family home sales to strengthen, which has historically been a reliable indicator of future single-family starts.”

Home prices also have appreciated greatly in the past years. Recent short sales of homes have prevented properties from turning into distressed homes, resulting in price appreciation of homes.

“The CoreLogic National House Price Index and FHFA Purchase Only Home Price Index are up 4.4% y/y and 3.7% y/y, respectively, and have outperformed our expectation of a 3.5% increase in home price increases this year. The main reason for the outperformance relative to our forecast has been the behavior of shadow inventory, where we expected a stronger housing market would result in more distressed supply coming onto the market, keeping a lid on price appreciation. This has not been the case so far in 2012 and, as a result, distressed pricing has rebounded in line with non-distressed pricing, leading home prices to outperform our expectations”

Consequentially, home price appreciation would translate to wealth effect, a boost in consumer spending due to an increase in perceived level of own wealth by each household.

“The rebound in home prices, which we expect to persist into 2013, has important implications outside the immediate housing market. Rising home prices that lead to increases in net housing wealth should reduce the incidence of negative equity and bolster consumer spending. According to data from CoreLogic, about 23% of all properties with a mortgage had a loan-to-value ratio in excess of 100% in Q1 2012, about the same as a year ago. Nearly 7% of properties with a mortgage have a loan-to-value ratio of 100-109%, suggesting that a significant number of households would leave a negative equity position with a fairly modest cumulative rebound in home prices.“

In conclusion, both consumers and businesses have benefitted from the recent housing market rally, and there is an implied optimism towards consumption and investments on a national level. However, going forward, there is the Fiscal Cliff that may have a detrimental effect on private sectors, potentially prodding the nation back into another recession. Given the status quo, equity market is edging up, but bonds market still remains as a safe haven amid policy uncertainty in the near future.

Original post can be found Here

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