war room 29 feb 2012 housing – rebound or reckoning ahead?
TRANSCRIPT
War Room 29 Feb 2012
Housing – Rebound or Reckoning Ahead?
War Room
•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome
Housing – Rebound or Reckoning Ahead?
•Housing Fundamentals
•Housing – Harsh Realities
• Scenario: Return to Long-Term Trend
•Scenario: US Housing Rebound
HOUSING - FUNDAMENTALSHiddenLevers
Housing Overview: Prices
Commercial real estate has worked off the bubble faster than residential, touching 0% 10 year growth recently.
Housing Overview: Foreclosures
The foreclosure rate is declining – this effect is more pronounced in Commercial RE, which has no robo-signing issues.
Housing Overview: Construction
New housing starts and home builders' sentiment track closely, and both show a slight rebound since the housing crash.
Housing Overview: Home Sales
New home sales are at all-time lows despite mortgage rates – the traditional inverse relationship has broken down.
HOUSING – HARSH REALITIESHiddenLevers
Housing Inventory
Inventory charts = mixed bag
- Fast decline in overall inventory
- Higher inventory than late 80s still
- big gap = shadow inventory
Shadow Inventory- 17 months of supply- downside pressure- head and shoulders?
Household Formation
Usual Bullish Argument: Housing Starts below trend (5 year low) IRRELEVANT
Housing Inventory- About 3.5 mm excess US homes- Must be absorbed by household formation
Household Formation- Usually above 1mm/year- Closer to 500k/year now- Affected by:
- marital status changes- birthrates- immigration - joining families- adult children at home
HOUSEHOLD FORMATION – FAMILIES
Family Household Formation = key to equilibrium
Non-Families = 34% of US population – dipped in 2008, now back to trend
Families = 66% of US population – decoupled since 2008
SCENARIO: RETURN TO LONG-TERM TRENDHiddenLevers
Return to Long-Term Trend: Timeline
Return to Long-Term Trend: Context
Return to Long-Term Trend: 120 years
Return to Long-Term Trend: What’s next?
SCENARIO: US HOUSING REBOUNDHiddenLevers
Housing Rebound: Affordability
Affordability highest in decades
Historically low mtg rates + price declines
75% of homes sold are now affordable to median income buyers
In many markets buying cheaper than renting
Sources: National Associations of Realtors, Home Builders, and Wells Fargo
NAR Affordability Index
NAHB Housing Opportunity Index
Housing Rebound: Jobs = Households
Household formation at half historical rate as young adults stay home
Job growth will eventually lead to household formation
Very tight correlation between household formation and housing market
Sources: National Associations of Realtors, Home Builders, and Wells Fargo
Consequences:
1. Home prices may suffer up to 30% more downside
2. Good chance of US economy going into recession
3. Pendulum’s don’t stop in the middle
4. Home ownership dies as an American tradition
Housing Rebound vs Back to Long-Term Norms
Consequences:
1. S+P to new highs, but muted impact from here
2. Industrial commodities will benefit most
3. Employment picture change will be cause
4. Rebound will in turn affect employment in sector
HiddenLevers - New Features
• Fixed Income Support
• Time Frames for Scenario Modeling
• Yield taken into account in Models
• Auto-notification of Missing Tickers
Coming soon:
• Macro Profile for a Portfolio