Housing stocks recover; economy next?
Home price growth in the U.S. soared to new records this year as pandemic-weary workers continued to engage in bidding wars with other homebuyers eager for more space. The S&P CoreLogic Case-Shiller national home price index posted a 16.6% annual gain in May, up from 14.8% in April — marking the 12th straight month of accelerating prices.
More recently the housing market has seen signs of slightly cooling: Existing-home sales rose 2% in July, marking two consecutive months of increases, according to the National Association of Realtors. “We see inventory beginning to tick up, which will lessen the intensity of multiple offers,” said Lawrence Yun, NAR’s chief economist, in the press release.
And that’s the biggest issue in the real estate market now: inventory – or lack of it.
In a note from Morgan Stanley, housing analysts say in order to get back to the housing market “normal” is an additional 1.1 million to 1.5 million homes, an enormous gap.
It’s not just the resale market, but also the building market that has been struggling and keeping these numbers from their normal ranges.
“We are not building enough homes,” Morgan Stanley strategists noted, pointing out that the net demand of shelter is around three years behind the annual growth the U.S. has seen and that there is a shortage of between 1.5 million and 5 million homes, depending on how you count.
This shortage is obvious to anyone looking to buy a house, and especially to those in the lower end of the market looking to buy their first dwelling as ballooning prices have put the goal of a down payment sum further out of reach for many.
“The housing shortage has contributed meaningfully to the record pace of home price appreciation we are currently experiencing,” the strategists wrote. “While the magnitude of the shortage described above means it is unlikely that we will find ourselves with an excess of supply at any point in the near future, the pace at which supply is contracting has slowed.”
Despite the slight cooling of a red hot housing market, Morgan Stanley expects the end of the year to see home prices up 9% versus the beginning of 2021, an increase in their previous 6.5% forecast.
Shortages aren’t the only thing causing the price increases. Older people are staying in their houses longer and delinquent home sales have decreased as government programs to prevent foreclosure and help borrowers in distress during the pandemic have kept supply tighter. Homeowner vacancy rates, Morgan Stanley said, are the lowest since the late 1970s, at 0.9%.
The fact that the market is strong despite the absence of the “shadow market” of delinquent houses is actually an encouraging sign.
“This lack of distress is part of the reason why we believe the housing market to be on such a healthy foundation,” the bank wrote. These houses that usually push down home prices since they’re often cheaper aren’t playing much of a role in the market, and borrowers in forbearance are doing well.
Morgan Stanley’s relatively upbeat view on housing is shared by other market observers who don’t see this trend going anywhere.
“While ‘2021’s housing bubble’ makes for great headlines, it ignores the longer run trends that both signal true excess,” wrote DataTrek’s Nicholas Colas on Thursday. “While house prices are certainly trending above long-run growth rates, they are not yet as elevated as 2005 on an 8-year trailing appreciation basis.”
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From the wire:
Housing Stocks Become Hot Item – By Colin Barr, Fortune, by way of Realtor.org
Investors who bought housing stocks at the beginning of the year after two and a half years of steep declines are being rewarded for their prescience.
As the Federal Reserve started cutting interest rates, the stocks of home builders Toll Brothers, Lennar, and Hovnanian rose 40 percent, 52 percent, and 96 percent respectively.
… “Stocks are predictive of the industry about six to nine months ahead of time,” adds Justin Walters of Bespoke Investment Group in Harrison, N.Y. He says he is bullish on the sector, noting that house-price futures at the Chicago Mercantile Exchange have been forecasting a bottom in house prices in many U.S. markets toward the end of 2008 …
While it’s true that some housing-related stocks have gone up this year, it only looks impressive because of how far they had fallen.
Toll Brothers, for example, reached over $35 a share, twice in the past two years, but hit a low of $15.49 in December 2007.
Everything is relative, I guess. (And, I’m not sure I’d call investors’ actions “prescience”.)
What do you think? Is there reason to be optimistic that the housing market will stabilize and (more importantly) that the US economy will avoid a recession?
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