September 13, 2011
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- Bu səhifədəki naviqasiya:
- Current Market Conditions – “Fear Sells”
- NAR Housing Affordability Index
- A Closer Look at the Multiple Catalysts that Should Produce a Robust Housing Recovery
- Excess Supply Being Reduced Through 4 Years of Significant Under-Building
Introduction
- 2 - will see outsized benefits when the housing recovery inevitably emerges, yet are well positioned to withstand a protracted extension of the currently stagnant environment. “A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point.” – Warren Buffett, 2010 Letter to Shareholders, February 26, 2011 Current Market Conditions – “Fear Sells” If you believe the headlines of major news outlets, you would be convinced that there is absolutely no potential for a housing recovery on the horizon. Clearly, the current housing supply is elevated, especially when you factor in the so-called shadow inventory, which includes borrowers that are seriously delinquent, homeowners that are in some stage of foreclosure and properties that have already been repossessed (REO). According to the National Association of Realtors, the current supply (end of July) of homes on the market stands at 9.4 months, but factoring in the shadow inventory (an additional 1.7 million units or an additional 5 months according to CoreLogic) the total housing supply stands at ~14 months. With approximately 22.5% of all U.S. mortgages currently underwater (note: this is a potential source of new housing supply that is not factored into the shadow inventory), the shadow inventory will likely remain elevated for a few more years. Nevertheless, it should be noted that the shadow inventory peaked in January 2010 at 2 million units or 8.5 months of supply. Absent a long term secular decline in home prices, the shadow inventory represents a finite supply of inventory that should be worked off in an orderly manner over the near/intermediate term. While the headline grabbing news agencies like to instill fear in their readers by focusing on one component of housing supply, it is worth noting that a traditional source of housing supply (new home construction) has contracted meaningfully. New housing starts were just 447,000 in 2010, only slightly above 2009 levels, which were the lowest levels since the Commerce Department began keeping records in 1959. It should be noted that housing starts have been well below longer-term averages (1.2 million starts annually) over the past 3 years.
Source: bankstocks.com, “It’s Not Just Banks’ Inventory Overhang That Will Drive Housing Prices”, 8/4/2011 Although weak economic conditions have negatively impacted the demand side of the housing equation, we believe that housing demand will likely pivot from a housing headwind to a tailwind in the not too distant future. Specifically, household formation (or net new U.S. households as depicted in the following chart) has been impacted in recent years by the economic malaise, but will likely spur an enormous demand for housing in the coming years. Primary sources of increased household formation may include (1) The 20 million adult children currently living with their parents, in large part due to the current economic/employment environment; and (2) A reversal of recent declines in immigration as economic growth in the U.S. improves and attracts more job-seekers.
Introduction
- 3 - Source: bankstocks.com, “It’s Not Just Banks’ Inventory Overhang That Will Drive Housing Prices”, 8/4/2011
In our view, robust demand will help not only to absorb the current excess supply, but also to drive future housing growth. Home affordability levels also give us optimism that healthier levels of demand will re-emerge in the not-too-distant future. During the housing boom, housing became unaffordable, but the correction in prices coupled with record low interest rates has dramatically powered home affordability levels up to record highs.
50 70
110 130
150 170
190 210
19 70 197 2 19 74 19 76 19 78 198
0 19 82 19 84 19 86 198
8 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06 20 08 20 10
Source: National Association of Realtors A weak U.S. dollar coupled with attractive prices is already beginning to attract foreign investors to the U.S. housing market. We note that a number of markets have experienced an inflow of foreign ownership, including Miami, which was among the hardest hit housing markets. Finally, we believe the aging baby boom generation with their rising pool of discretionary income will help absorb a large amount of the excess supply as they purchase
Introduction
- 4 - second homes for their retirement. While the baby boomers were certainly not immune to the hits taken to real estate and investment portfolio values during the last decade, we would note that the most affordable housing markets today are located in traditionally attractive retirement areas (Florida, Arizona, Southern California, Las Vegas, etc.). Although we would expect boomers to remain in their current residences for a number of years given lifestyle factors (healthier generation, desire to be closer to grandchildren, etc.) we would not be surprised if they began to absorb a significant amount of the excess supply in the hard hit markets that would initially be utilized as second homes.
Below we provide a detailed review of the current housing supply/demand conditions and address what we see as the powerful demand drivers for housing.
Just as the pendulum swung from an equilibrium of housing starts in the early 2000s to a surplus in 2004 and 2005, we believe the pendulum has swung to the other extreme and there will be a shortage of supply when housing demand normalizes. Using housing permits as a proxy for housing starts/construction (since this data is widely available and has closely tracked new housing construction), median housing starts totaled approximately 1.5 million homes per year since 1960. This figure is more or less in line with long term housing demand which is estimated to be roughly 1.35 million per year, consisting of household formations (750,000), obsolescence (400,000), and second homes (200,000). As a result of the bursting of the stock market bubble in March 2000, the subsequent lowering of interest rates by the Federal Reserve (Fed Funds rate decreased from 6.5% in May 2000 to 3.0% in May 2005), the growth of creative financing (no down payment, liar loans, interest-only loans, negative amortization), and the public’s disenchantment with the stock market, individuals and investors (speculators or flippers) alike shifted an enormous amount of capital to real estate. Between 2000 and 2006, sales of new and existing homes increased by 14% and 26%, respectively. Home builders responded in kind and actually overshot demand with increased production, to the tune of a cumulative 2.4 million homes built in excess of estimated long-term demand between 2004 and 2006.
Source: U.S. Census Bureau; NAHB via PulteGroup, Inc., Investor Presentation, June 2011
Source: Moody’s Analytics, “Housing Hits Bottom in 2011”
housing bubble. As interest rates on adjustable rate mortgages reset at higher rates, homeowners increasingly began to default on their mortgages due to higher mortgage payments, spurring increased bank foreclosure activity. Yüklə 4,37 Mb. Dostları ilə paylaş:
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