Monday, January 23, 2012

Two data points on US housing

Two recent data points add support to our thesis of the US housing market bottoming this year. The first one is from the National Association of Home Builders (NAHB).  NAHB publishes an index that represents builder perception of the market conditions.  Here is how they determine the index,
Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as 'good,' 'fair' or 'poor.' The survey also asks builders to rate traffic of prospective buyers as 'high to very high,' 'average' or 'low to very low.' Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
The recent moves in the index certainly have not reversed the loss of the "happy days" for builders since 2006, but it has been rising.

NAHB Index (Bloomberg)
This is what NAHB had to say when the latest number was released last week:
NAHB: “Builders are seeing greater interest among potential buyers as employment and consumer confidence slowly improve in a growing number of markets, and this has helped to move the confidence gauge up from near-historic lows in the first half of 2011,” noted NAHB Chief Economist David Crowe. “That said, caution remains the word of the day as many builders continue to voice concerns about potential clients being unable to qualify for an affordable mortgage, appraisals coming through below construction cost, and the continuing flow of foreclosed properties hitting the market.”
There is no question that lack of financing and a large distressed inventory continue to weigh on the market. Builders are in fact still quite cautions, but they don't see the situation as dire as they did just a few months back. And low levels of new construction will cap the housing inventory growth, helping markets recover.

The second data point is the convergence of the median cost of rent (monthly payments) with the median mortgage payments (monthly principal and interest). 

Source: Capital Economics
We are now at the levels where for some people it may make sense to purchase a house, possibly as an investment in a rental property.  Even at distressed prices, these transactions transfer assets from weaker holders to stronger ones, providing longer term support to the market.

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