5 REASONS 2012 WILL BE THE START OF A U.S. HOUSING RECOVERY
By Walter Kurtz, Sober Look
As we await the fully anticipated downgrade of France as well as Austria and others in the eurozone before the long weekend, it is difficult to think positive thoughts about the US housing market. But at the risk of getting bombarded with more angry emails, here are five reasons 2012 will be the year the US housing market will start recovering.
1. Housing inventory levels have tightened considerably:
A. Existing homes for sale number is near the long-term average after the revision.
 |
| Single Family home sales
(millions, annualized, source: Capital Economics) |
B. The number of unsold homes (new and existing) as a fraction of the population in the US is at a 7-year low. As household formation picks up, so will the demand for homes.
 |
| Total number of unsold homes as
% of population (Bloomberg) |
C. Housing starts continue to stay subdued with only limited inventory added.
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| Single family housing starts (Bloomberg) |
2. Home sales are stabilizing in spite of QE2 ending last summer.
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| Existing home sales (Bloomberg) |
3. Downpayment required on new mortgages is back down to 20% versus around 25% in 2010.
 |
| Loan-to-value on new mortgages (Capital Economics) |
4. New mortgage payment affordability is now at best levels in recent history.
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| New mortgage monthly payment as % ofmedian income (Capital Economics) |
5. The market is telling us recovery may already be under way. The chart below shows the share price history of Hovnanian Enterprises, a company that builds single-family homes. The market is anticipating improved demand for homes.
 |
| HOV share price vs SP500 |
Just to counter-balance things a bit, the latest from Doctor Doom:
http://www.project-syndicate.org/commentary/roubini46/English
Gee, they guy didn’t write a single positive thing is this piece, yet it all seems to make sense to this bear. Contrarian arguments anyone?
Octavio, I’ll counter a couple of his points:
“First, US consumers remain income-challenged, wealth-challenged, and debt-constrained. Disposable income has been growing modestly – despite real-wage stagnation – mostly as a result of tax cuts and transfer payments. This is not sustainable: eventually, transfer payments will have to be reduced and taxes raised to reduce the fiscal deficit. “
As any MMTer will tell you, this is simply a fallacy. And above and beyond MMT arguments, the deficit will naturally fall as the economy picks up steam and tax revenues increase.
“At the same time, US job growth is still too mediocre to make a dent in the overall unemployment rate and on labor income. The US needs to create at least 150,000 jobs per month on a consistent basis just to stabilize the unemployment rate.”
This one really grates on me. Yes, the US may indeed need to create 150,000 jobs a month to stabilize the unemployment rate. But it does not need to generate 150,000 jobs to stimulate the economy. 100,000 or 50,000 or basically ANY job gain improves the economy.
In other words, the unemployment rate is not a good indicator of total economic activity. The economy can grow at the same time the unemployment rate is increasing if the population is growing faster than the number of new jobs. This might not be optimal from a social or political perspective, but it is a fact that should not be overlooked from an investment perspective.
“Rising income inequality will also constrain consumption growth, as income shares shift from those with a higher marginal propensity to spend (workers and the less wealthy) to those with a higher marginal propensity to save (corporate firms and wealthy households).”
Corporate firms are also MUCH more likely to create actual jobs than workers and the less wealthy.
That being said, I’m actually a bit bearish myself. But I think some of the reasons spewed by the king of all bears, are lacking, well, reason…..
Jaymaster, regarding your first counter-point (raise taxes reduce deficits…), you are of course absolutely right. The problem however is that although MMT is becoming more accepted, very few people in decision-making positions believe our “crap” – look at Ron Paul as an extreme example – can you imagine him changing his views about the USA’s bankruptcy?
This is the issue we as investors always need to bear in mind – not what “should” happen but what will likely happen. Right now there’s a real risk America’s politicians will make some grave policy errors based on their poor understanding of the monetary system.
jaymaster-
I’m not sure I get your point about employment, the unemployment rate
“This one really grates on me. Yes, the US may indeed need to create 150,000 jobs a month to stabilize the unemployment rate. But it does not need to generate 150,000 jobs to stimulate the economy. 100,000 or 50,000 or basically ANY job gain improves the economy.”
Most estimates are that the the US workforce is growing by ~ 1.5M people per year, net of new entrants, retirees, and immigration. And this does not include jobs required to raise the labor rate back to where it was from the millions of people leaving the labor pool. That’s were the 125k per month jobs comes from. If the economy is only creating 100 new jobs a month for a year society, and the economy is much worse off. I guess if you’re talking about the economy being larger you are correct, but the economy on a per capita basis, which is what really matters, lags unless the new entrants can be put to productive work.
2012 could very well be the start of the recovery, but it will be a multi-year process filled with peaks and valleys. I think home values will continue to make new lows but will not experience a huge drop off. More of a slow grind.
I consider myself part of the next generation of homebuyers (I’m 29, getting married soon, going to start a family in the next few years) and am still renting. Many of my friends are doing the same. In a few years I feel like I will finally be ready to purchase. But until then I am in no rush whatsoever.
Brian, When you buy consider something that has a rental apartment. It will offset your costs of ownership plus give you a place for rightoffs. We run a business on our property and it pays us back in many ways. Best wishes when you get married.
Just as a counter, 9.8 million shadow inventory according to this recent on naked capitalism.
http://www.nakedcapitalism.com/2012/01/michael-olenick-10-million-shadow-inventory-says-housing-market-is-a-long-way-from-the-bottom.html
not even at the bottom yet.
prescient econ control by humans in government?
dreamers dream on.
Several counterpoints to this post. All these charts reflect the housing industry itself and so using historical comparisons to how the housing sector should be performing misses the point if the rest of the economy is not behaving the way it is expected. Growing income inequality and substantial government transfer payments are not the stuff of a srtrong housing sector. Housing affordability is meaningless if you believe home prices will continue to decline and you’re worried about job security. Prices are still declining and the huge foreclosure issue will likely drag out a true recovery for years.
Case in point: Las Vegas is having record home sales, mostly cash and REO properties and prices are still falling. This is not a typical, normal, or even a desirable form of recovery.
As the author of Minyanville’s Housing Market Report, I get really tired of reading this nonsense about why this is finally the year of a bottom in housing. We’ve been hearing it for the last 3+ years and it hasn’t happened.
Guess what. Ain’t gonna happen. I’ve been saying for nearly two years that there is no housing bottom in sight and I’ve been spot on. I’ve presented overwhelming evidence in charts, tables and never-seen-before graphs and in-depth analysis in over 25 articles and six in-depth reports on major metros.
Cullen used to post them regularly but now apparently has no time to even read them. That’s unfortunate because it increases the chance that you investors and homeowners will act on the basis of this drivel.
I suggest that you batten down the hatches and prepare for the coming storm.
This article is really funny. Even a broken clock is right twice a day. Keep recycling these and one of these years it will be correct.
#1 and #4 have been true for years…. ‘nuf said.
Calculated Risk still shows new home sales for all intents and purposes at the lowest levels on record, going back to the early 60s and existing home sales consistent with ’97 / ’98 levels, more than 10% below where they were from ’99 – ’02 before the bubble really hit…
http://www.crgraphs.com/2011/10/new-home-sales.html
http://www.crgraphs.com/2011/10/existing-home-sales.html
My favorite though is # 5… A graph of HOV vs XHB (S&P home builders) or ITB (DJ Home Construction) shows a relatively similar outperformance as the S&P500…. So HOV is popping, not all homebuilders. We saw HOV do this between Feb ’09 and Aug ’09 and again between Jan ’10 and Apr ’10. . . . so again, nothing new.
Other than that, I think home builders will definitely have a great year in ’12.
I call “BS” on chart no.4 (ratio of new monthly mortgage payment as percentage of median income). I’m not sure what “new monthly mortgage payment” means, but if you make a chart comparing the monthly mortgage payment for the average house including property taxes and principal repayment (on a 30-yr self-amortizing schedule) with median income it doesn’t have anything like that big dip since 2008.
Most people buy a house based on their monthly payment. While lower interest rates will reduce that payment, they will not affect the tax and principal repayment portion. If the median house price is $210,000, the buyer would need to pay $7000 per year in principal repayment as well as $4000 in property taxes (at a 2% rate–the national average). That’s almost $1000 per year before any interest is paid. This portion is almost certainly more than the interest payment for most of the loan.
Forcing interest rates lower will help reduce mortgage payments, but certainly not to the extent shown in chart 4.
All these comments beg the question, what will a housing recovery look like? Assuredly, recovery will be uneven. Some areas will fall while others rise. Not all real estate is equal. Some segments will rise, while other segments fall until equilibrium is reached.