JP Morgan Research Marks a Housing Market Turn
This morning, Michael Rehaut, home building and materials analyst at JP Morgan, writes:
While fundamentals will likely not demonstrate an uninterrupted solid rate of improvement over the next 6-12 months, we believe that not only is housing solidly past its trough, but over the next 24 months will continue to recover and drive further upside to the current rally in the homebuilder stocks. Importantly, we believe a key distinction between today and the last three and a half years, during which time we have largely maintained our negative stance, is that during the downturn not only did supply rise, but demand also consistently fell as different buyers exited the market. Today, despite being elevated, supply appears more manageable, while demand has begun to stabilize and even slowly reemerge. In such an environment, we believe the builders will once again demonstrate positive order growth – historically a powerful positive catalyst – and home price declines will near their end, resulting in the abatement of impairment charges.
The moving target on supply is the foreclosure wave and how and when it gets absorbed during the 24-month period Rehaut eyes for stabilizing of home building’s landscape. As for demand, despite an uptick in the past quarter, some $12.2 trillion in lost household wealth will probably weigh heavily for some time on home buyer motivations. That figure knocks psychology as well as financial means for a loop in predicting buyer behavior.
“The desire is still there for the American Dream of homeownership,” says Senator Johnny Isakson (R-Ga.), who’s backing a hotly contested measure to extend and expand an $8,000 tax credit due to expire Dec. 1. Isakson is convinced that the domino-effect of a sudden, forceful, brief shove in demand for all price points in housing with taxpayer money would pay off in jobs, stabilized household equity, consumer spending, corporate earnings, and resumed economic expansion. “It wasn’t the focus on homeownership that was the problem, it was lending money to people who could not afford homeownership.”
Builderonline.com’s Boyce Thompson has doubts an extension to the credit is in the cards thanks to the incipient broader economic recovery.
But the sustainability of the current recovery is what’s in question. Minus a home buyer tax credit, particularly in the seasonal low-ebb of housing from December through February, we’d be looking at another brutal stretch for an industry that could put people back on payrolls.
Is Rehaut right to look at year on year comps ahead and conclude we’ve reached the bright line moment? He’s not going too far out on a limb with a prediction for improvement over the next 24 months.
Still, we think too many signals are in conflict to say we’ve turned the corner just yet. That might be because our viewpoint is the many home building enterprises still living on the vapor of their cash reserves and a few sales here and there.
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