MARKET RECAP

The news is understandably slow the week between Christmas and New Year’s Day. The most notable release was last Friday’s news on new home sales, which rose to an annualized rate of 315,000 units in November, a 1.6-percent gain over October.

To be sure, we have a long way to go until we reach the normalized construction rate of 1.5-million units per year. Nevertheless, we expect the new-home market to gain pace in 2012. After all, there are only 158,000 units in inventory. Even at the current slow sales pace, this equates to a record low six-month supply
Over the past three years, new-home construction has fallen far below historical norms and also below the level needed to keep pace with population growth. The fact is our country gains roughly 2.7 million people and one million new households annually.

You might not see supply as a problem. We are all familiar with the glut of distressed properties. Indeed, Bank of America expects eight million distressed homes to come to market over the next four years. These homes, we’ve so often heard, will continue to depress new home construction.

We view B-of-A’s outlook with a skeptical eye. There is a likely prospect that many of these distressed properties will simply go away. Destruction is too frequently overlooked in many supply projections. A house is not a permanent structure. Many are destroyed by fire, wind and flood each year. Many more are lost through simple decay and abandonment. Based on U.S. Census data, 300,000 homes are lost annually. That number will surely rise in years to come.

In short, the math – low inventory plus more households minus more home destruction – suggests to us a rebound in new-home construction. We are not alone in this contention, either. Wells Fargo projects that housing starts will continue to rise each year for the next five years before reaching once again the normalized construction rate of 1.5-million units annually by 2017.

Of course, projections are one thing, betting on those projections is another. Here, we see an encouraging trend. Big money is starting to wager on housing. The Wall Street Journal reports that many large hedge funds are investing billions in housing-related investments. Other investors have followed suit. Shares of homebuilders are up 30 percent over the past three months, making them one of the best performing investments in the market.

Up For A New Year

As we approach the end of the old year nearly all of us stop to ask, “How will the new year unfold?” Of course, none of us know with any certainty the answer to that question, but it can be insightful (and fun) to ponder. So, how will 2012 unfold, at least as it pertains to the housing and mortgage markets?

Both markets will obviously be influenced by economic growth, which, in turn, will spur job growth. We see a pick up in economic growth and job growth in 2012.
The economy has been growing at a sluggish rate for too long now. The United States is unique in that Americans tire of pessimism quicker than most other cultures, and then we do something about it. In our opinion, rising consumer confidence points to a lot of pent-up demand that is waiting to bust loose, and will bust loose in 2012.

A pick up in demand, in turn, necessitates new hires. In fact, a recent survey by CareerBuilder.com found that nearly one in four employers is keen to add new permanent full-time employees. These employers are simply waiting for a clear sign the coast is clear. We think they will get that sign in the first quarter of 2012.

Greater economic activity will obviously impact the housing market. We see accelerated sales volume in both the new and existing home markets. We also expect to see prices stabilize in the first half of the year, and then appreciate perceptibly in the second half.

As for the mortgage market? This is much more difficult to call. The Federal Reserve has stated it intends to hold rates low through 2012. However, all it takes are a few persuasive signs that the economy is back on track, and the Fed could easily backtrack from its stated goals. All we can say is that we would be much less surprised to see mortgage rates 50 basis points higher six months from today than 50 basis points lower.

Graph Courtesy from NY Times in an article by Vickie Elmer December 29, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.