MARKET RECAP
Last week we were a little down on the latest spat of housing data, which showed home prices in many burgs resorting to old form –that is, falling. CoreLogic, Zillow and Case-Shiller all posit that home prices in many metropolitan regions had slipped a couple percentage points in the fourth quarter of 2011.
For the past half-year or so, we've been saying that the bottom is at hand, if it hasn't already been passed. In many areas of the country, that is the case: prices are moving higher. Real estate markets, we are quick to note, are local markets.
When speaking of bottoms, there is actually more than one: there is a bottom for prices, a bottom for starts and a bottom for sales. These bottoms won't necessarily occur simultaneously, but there must be some synchronization. If you are a homebuilder, you are not going to add to inventory if you think prices remain in a downtrend. If you're a buyer, you're not going to buy if you think a cheaper price may be available down the road.
Because their livelihood is tethered to prices and demand, homebuilders are worth watching. On this front, we like what we see. Sentiment is improving, and Bank of America analysts expect residential construction to increase 15 percent this year, bumping average annual starts up to 710,000 units. You don't ramp up production if you think prices are in a downtrend.
Of course, homebuilders must contend with shadow inventory, REO and foreclosed properties, which many pundits expect to hold price increases in check. It's worth noting, though, that many shadow properties were sold to subprime borrowers and many have been abandoned for a considerable amount of time –to the point where they are reclamation projects for only the handiest of handymen.
Many of these homes will likely just go away. In fact, 300,000 homes are lost through neglect, abandonment, natural disaster and demolition each year. We wouldn't be surprised to see that number rise as we get farther away from the subprime meltdown years of 2007 and 2008, thus we'll see more supply removed from the market.
Despite the current price travails, we remain convinced that residential real estate will be a top performing asset class over the next decade. Bubbles that pop produce a lot of value. Technology stocks are a recent example. Had you purchased technology stocks a couple years after the Internet bubble burst in 2000, you would be sitting in very high cotton today.
Unlike stocks, real estate can be readily mortgaged. Given today's multi-decade low mortgage rates, many buyers are better off financing rather than paying cash for their purchase.
The mortgage market has been driven by refinances over the past couple years. We would like to see more of it driven by purchases. The good news is we expect that to be the case in 2012.
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