Here’s a contrarian view for you. Credit Suisse says the fears about housing are well overdone. In their analysis they cite 6 different bullish factors that should help to bolster house prices in the USA:
- The government now owns or guarantees about 70% of US mortgage debt ($11.5trn), thus any knock-on impact from a fall in house prices should be much lower than in 2007-2008 and the flow of foreclosure onto the market can be managed well (recall that since April 2009, 3.1 million trial loan modifications have been made);
- Valuation is extremely cheap on all measures (price to income, price to rent, affordability index, rental yields).
- Delinquency ratios, charge-off and foreclosure rates seem to have peaked.
- Housing starts are about 1m below trend demand of housing units – based on household formation and replacement demand. The question is: What is the level of excess inventory? The number of unsold new and existing homes have fallen by 63% and 14% from the peak, respectively; if we then assume half the foreclosed property becomes vacant (i.e. half of the 2.3m homes currently foreclosed), this amounts to 2.7m homes, which should take 2 ½ to 3 years to absorb.
- Distressed sales (short-sales, foreclosures and REO sales) are less than a third of the total, after peaking at almost half in 2009;
- Housing as a proportion of GDP is now just 2.2%, compared with a long-run average of 4.5%.
Can’t say I entirely agree, but it’s always nice to keep an eye on both sides of the argument….