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Oct 27, 2010

Credit Suisse: Here Are 6 Reasons To Be Bullish On Housing

by Rebekah Collins — last modified Oct 27, 2010 04:06 PM
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In these uncertain times, financial gurus are citing many reasons why new home buyers should be hopeful about the future of the housing market. In this article, there are 6 reasons for new home builders and new home buyers to understand that the real estate market may be looking up. The government now owns or guarantees about 70% of US mortgage debt ($11.5trn), thus any knock-on impact from a fall in house prices should be much lower than in 2007-2008 and the flow of foreclosure onto the market can be managed well (recall that since April 2009, 3.1 million trial loan modifications have been made). Valuation is extremely cheap on all measures (price to income, price to rent, affordability index, rental yields). Delinquency ratios, charge-off and foreclosure rates seem to have peaked. Housing starts are about 1m below trend demand of housing units – based on household formation and replacement demand. The question is: What is the level of excess inventory? The number of unsold new and existing homes have fallen by 63% and 14% from the peak, respectively; if we then assume half the foreclosed property becomes vacant (i.e. half of the 2.3m homes currently foreclosed), this amounts to 2.7m homes, which should take 2 ½ to 3 years to absorb. Distressed sales (short-sales, foreclosures and REO sales) are less than a third of the total, after peaking at almost half in 2009. Housing as a proportion of GDP is now just 2.2%, compared with a long-run average of 4.5%. Now is the time to buy a new home. Contact your local home builder for more information.

       Here’s a contrarian view for you.  Credit Suisse says the fears about housing are well overdone.  In their analysis they cite 6 different bullish factors that should help to bolster house prices in the USA:

  • The government now owns or guarantees about 70% of US mortgage debt ($11.5trn), thus any knock-on impact from a fall in house prices should be much lower than in 2007-2008 and the flow of foreclosure onto the market can be managed well (recall that since April 2009, 3.1 million trial loan modifications have been made).
  • Valuation is extremely cheap on all measures (price to income, price to rent, affordability index, rental yields).
  • Delinquency ratios, charge-off and foreclosure rates seem to have peaked.
  • Housing starts are about 1m below trend demand of housing units – based on household formation and replacement demand. The question is: What is the level of excess inventory? The number of unsold new and existing homes have fallen by 63% and 14% from the peak, respectively; if we then assume half the foreclosed property becomes vacant (i.e. half of the 2.3m homes currently foreclosed), this amounts to 2.7m homes, which should take 2 ½ to 3 years to absorb.
  • Distressed sales (short-sales, foreclosures and REO sales) are less than a third of the total, after peaking at almost half in 2009.
  • Housing as a proportion of GDP is now just 2.2%, compared with a long-run average of 4.5%.

 

 

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