Housing Recovery? Try Long Convalescence
By Russ Koesterich
September 18, 2012
The US Federal Reserve’s decision to expand quantitative easing is dramatic, but we don’t think it will have a significant impact on the US housing market. While the extra liquidity is supportive of risky assets in the very near-term, lower mortgage rates are not a game-changer for a consumer still struggling with little income growth and too much debt.
Certainly, the prospect of buying another $40 billion a month of mortgage-backed securities will help keep home-loan rates low for a long time, but they were already low. In July, a conventional 30-year mortgage could be had for 3.75%. It’s not clear that a potential 50 basis-point reduction in mortgage rates will spur a housing renaissance. Our view remains that, while the housing market is clearly on the mend, it’s going to be a long convalescence.
Yet, home building has rebounded. This summer, housing starts rose to an annualized rate of 750,000, the highest since the fall of 2008. Homes have become significantly more affordable: cheaper to buy and more lucrative to rent out. That said, housing still faces several headwinds.
First, even with the rebound in home building, housing starts are still barely half of their 50-year average. Second, slower population growth and household formation are likely to lead to less demand. Third, there is still a significant shadow inventory of unsold homes: properties that are in foreclosure, but have not yet been sold; dwelling mortgages in arrears; and real estate that owners are delaying putting on the market until prices improve.
Perhaps most importantly, consumer debt levels are still high by historic standards, suggesting that households may be reluctant to take on additional debt, even if mortgage rates are low. All of this suggests that while home prices have probably bottomed, they are likely to remain flat, at least in inflation adjusted terms, for several more years. This pattern is consistent with what has happened in other countries that have experienced housing bubbles.
The bottom line: we remain neutral on housing related stocks, including real estate investment trusts (REITs), because it will be several more years before we return to a normal environment for the housing sector.
In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility. Real estate investment trusts (“REITs”) are subject to changes in economic conditions, credit risk and interest rate fluctuations.
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