While almost everyone is bearish on housing, Goldman Sachs is especially pessimistic.Recently the investment bank predicted flat growth in housing starts through 2012. Today Goldman defended this forecast, which was “generally regarded as overly harsh,” by pointing to bad news from Hovnanian and Mohawk, as well as abysmal mortgage application levels.
And don’t expect the Fed to help anything:
Our economists expect the Fed to introduce “Fed twists” at its upcoming meeting on Sept 20-21. This monetary policy move involves buying long-dated securities with the proceeds of short-dated security sales. The plausible impact is lower long-term interest rates. While this is seemingly positive for the housing industry, our concern is the lack of consumer response to falling interest rates over the last year. In fact, the correlation between sales and rates have changed from a 66% negative correlation from 1971-2004 to a 61% positive correlation. Separately, mortgage spreads (i.e., banks’ required return on mortgages) have recently spiked, signaling to us that banks are looking to recoup some of the negative profit implications of even lower long-term rates. We believe that increased consumer confidence (if that were to be a result of further Fed action) would have a bigger impact than the pure mechanics of the Fed twist.
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