Thursday, February 4, 2010

US Housing a Double Dip CIBC World Markets

US Housing—A Double Dip
Benjamin Tal and Meny Grauman

The US economy may be on the mend, but a full-fledged recovery in the residential real estate market is still years away. After an unprecedented multi-year collapse most housing indicators have stabilized, but whatever signs of improvement do exist are more a function of a badly damaged market, and the distorting effect of temporary tax incentives, than evidence of a sustainable rebound. Starts, sales and prices are ended 2009 higher than they were earlier in the year, but we anticipate further weakness ahead as supply continues to outpace demand, mortgage rates head higher, and the government’s generous home-buyers tax credit finally expires. That has significant implications for related equities which have already priced in a steady recovery in the US housing market.

Short-Lived Remedies

Just how strong an impact recent tax policy has had is clearly visible in the flood of purchases of existing homes, where foreclosures beat down prices to levels tempting to the first time buyers who initially qualified for the program. During the past year in which the program has been in effect, sales of existing homes have climbed by 15%, while new home sales have actually dropped by 5%. In fact, the usually stable sales ratio between the two has more than tripled, recently hitting a record high 18 (Chart 1). But after being extended once by the Obama Administration, this tax credit will expire at the end of April—putting downward pressure on demand for existing home sales. That prospect will make it more difficult to clear out the next wave of foreclosures, prompting another down leg in US house prices.
Shadow Inventory

But the risk of a double dip in US home prices is not simply the result of properties being sold at “fire-sale” valuations, but also due to a deluge of shadow inventory coming onto the market. Although conventional inventories are trending lower, shadow inventories, capturing seriously delinquent and bank-owned properties, are just as large.
There are close to two million mortgages that are more than 90 days delinquent, and nearly all of these will end up in foreclosure, given that over the past three years the “cure rate” of this category fell from 40% to less than one percent. Add to that the 2.3 million properties that are in foreclosure or already seized by banks, and total inventories (conventional and shadow) are now running at over 8 million units (Chart 2). At current sales rates, that adds up to a record high 16 months of supply. True, this “shadow” stock will not hit the market all at the same time as banks manage their supply of seized properties, but this constant flow is likely to keep markets depressed for a while.


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