Tuesday, July 24, 2012

The abbreviated "What we are reading today 7-24-12" or Housing is at a bottom

We got bogged in a number of items today, including earnings and the steep sell of of coal names, and our links post is abbreviated today.

Chinese flash PMI improved but still below the 50 level indicating growth
     
                More here


Why you are just unlucky and other are careless

U.S. housing is recovering according to Zillow

We think the Zillow report suggesting that U.S. housing is recovering is very important. It has been our contention that U.S. housing is in a bottoming process. For instance, look at the chart of the Dow Jone U.S. Select  Home Construction Index.


The above chart shows that housing construction stocks have been discounting a bottom in the market since around the end of 2011. The group continues to outperform in 2012 and is refuses to correct to any great degree in spite of general market uncertainty.

More importantly, we think the below chart from CSFB really describes a large reason why the housing market is recovering.

This is an older chart showing CSFB's estimates of the wave of mortgage resets that were to occur over the period from 2007 through 2016. What is obvious is that the large wave of mortgage resets are behind us. We believe that this implies that, despite a large shadow inventory and too many foreclosures, at the margin, the number of homes that will be forced upon the market and sold at discount prices will wane- if not falling already. A reduction in the number of homes being forced on the market reduces the pressure on home pricing.

One of the most important indicators, in our opinion, is the discrepancy between what one could get in rent payments for a particular housing unit vs. the expected mortgage on the same or similar properties. In many areas of the country (and we have to admit that we have not done an exhaustive search but it appears to hold for most of the regions we looked at) rental prices are above estimated mortgage costs, thus making these properties cash flow positive from an investor's point off view. In fact, we have read many articles in the last few months that state hedge funds and other investors are buying properties to get the rental income. This creates a natural floor under housing.

We think these are important signs that housing is in a bottoming process. However, this is not to say that there is only blue skies from here on out. Many structural issues remain. For one, economic volatility due to systematic leverage will likely make the ebb and flow of the housing recovery uneven. Another important point to remember is that there is likely a large pool of potential housing inventory. Both the actual housing inventory and the talked about shadow inventory levels are what we describe as the kinetic or near-kinetic, or more active, inventory. Potential inventory levels are a nebulous concept but is largely made up of those home owners that have tried to sell or would like to sell their homes but are unable to due to market conditions. Any substantial rise in housing prices may result in the potential inventory becoming kinetic, thus increasing the supply of homes and putting a ceiling on the rise in home prices.

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