Michelle Meyer's Housing Outlook For 2012

michelle meyerBofA’s Michelle Meyer

Photo: Bloomberg

Homebuilder stocks have been on a tear lately.But this doesn’t mean you should be bullish on the housing market, warns Bank of America U.S. Economist Michelle Meyer.

“The housing bulls argue that housing starts have “undershot” for the past several years and pent-up demand for new construction homes will lead to a boom in single family building this year. We don’t disagree with this premise; but we do disagree with the timing. With slow¬† economic growth this year and a glut of foreclosures, we think it is too early to get bulled up on single family construction. Be patient.”

Meyer recently published her latest Housing Watch note, which addresses eight key questions regarding the outlook for housing.

Single family housing starts will move sideways

Single family housing starts have been flat since 2009 and will continue to be flat through 2012 due to the overhang in existing inventory. Existing homes are not completely comparable to new homes, but their heavy discount in price have made them increasingly attractive to new home buyers.

However, a significant upside surprise in the economy could breathe life into housing starts.

Source: Bank of America

Multifamily construction and renovation activity will continue to boom

Multifamily homes have been on the rise as more people have shifted from owning to renting. As such, the strength in multifamily homes is offset by weakness in single family homes. Bank of America expects this trend of falling homeownership rates to continue for at least several more years.

The outlook for construction and renovation activity is positive as many homes being sold are foreclosures, which require much more home improvement spending.

Source: Bank of America

Residential construction's contribution to 2012 GDP growth will be below trend

Residential construction will add 0.1 percentage point to GDP in 2012 and 0.2 pp in 2013 thanks to multifamily construction and renovation. However, this is well below the 0.7 pp you see ina typical expansion.

Source: Bank of America

Home prices have further to fall

Home prices will continue to lag, falling another 7% through 2013. However, they should turn up notably in 2014 and accelerate to a 5% annual growth rate from 2015 to 2020.

Source: Bank of America

Biggest obstacle for housing is all of the foreclosure liquidations

Foreclosed properties will continue to be the biggest obstacle for the housing market. BofA estimates 8 million foreclosed homes will be over the next four years. The foreclosure process is currently being delayed by the government, but that should be cleared up soon and housing prices will be put under pressure. But the sooner we get to the bottom, the sooner prices will start to move up.

Source: Bank of America

Possible policy responses include an REO-to-rental plan

BofA thinks an REO-to-rental program is the most likely of the policy options on the table. This would help move the foreclosure process along. The details of such a plan can only be speculated right now, but would certainly involve some sort of bulk transaction of homes.

Source: Bank of America

Risks to BofA's outlook is economic growth that surprise to the upside or downside

All eyes will be on the macro economy. Should things deteriorate, we could see home prices deteriorate substantially. Then again, the opposite could happen to the upside, especially since the decline in household formation rates implies pent-up demand.

Source: Bank of America

In any scenario, it should take years before the housing market returns to normal

Ultimately, it will take years before the housing market really stabilizes and starts to improve again. Assuming foreclosure rates pick up soon

  • the housing market should normalize in 2014
  • housing starts should return to trend by 2017
  • prices will start to rise in 2014 and reach fair value by 2019

Source: Bank of America

Which analysts should we be listening to?

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