US housing recovery should underpin economy says HSBC Private Bank

2nd April 2013

The US housing market recovery is sustainable and should underpin the US economic recovery as the housing stock available for sale falls argues HSBC Private Bank.

The bank says that US house prices are recovering at a healthy pace and are a key factor supporting US economic recovery. While prices remain far below the 2006 peak, it says this suggests more potential to improve in the coming quarters.

In a note, the bank says: “The fall in house price from the peak in 2006 was 35 per cent when measured with the S&P /Case-Shiller house price index. In real terms adjusting for inflation, the peak to trough fall was closer to 43 per cent. Since the trough in the house price indices, prices have risen by approximately nine per cent on the S&P/Case-Shiller index, and by around  seven per cent in real terms. House prices in the US still remain some way below the peak, and have the potential to recover further over coming quarters in our view.

“To be sure, the fall in house prices was a major factor that contributed to the great recession as residential investment contributed to as much as 5 per cent of GDP in 2006; today we estimate that number is closer to just 2.8 per cent, but importantly this is an improvement compared to the depths of the recession.”

HSBC adds that a recovery helps construction, but also employment in housing related services and it has a clear wealth effect.

“The rise in consumer confidence and fall in the saving ratio has been instrumental in offsetting the negative impact of rising taxes on consumption so far this year, and we believe that the recovering housing market goes some way to explaining this move. And, in our view, the conditions are in place for this recovery to continue,” it adds.

The bank also believes confidence in growing in a sustained housing recovery.

He says: “Crucially a number of forward-looking indicators suggest this is sustainable. In our view, a key factor that has held back the recovery in the US housing market has been that the stock of housing available for sale was too high, thus depressing prices. This was partly the result of the overhang from over investment i.e. too much building before the crisis, but another key aspect was the number of foreclosed homes available for sale. However, this situation now seems to have reversed as robust sales of existing homes has reduced the inventory of homes available for sale back to pre-crisis levels.”

“The falling supply of homes for sale has been one of the key drivers of the recovery in housing starts in the US for both multi and single-family homes, which have seen a sharp improvement in recent months. Other key factors have been that affordability has improved, encouraged by low interest rates, and a gradually improving jobs market. In our view, interest rates are likely to stay very low for some time yet; furthermore, US banks’ credit standards are showing signs of easing, and consumers’ appetite to take on extra borrowing appears to be increasing. Thus, in our view, affordability and therefore demand should remain relatively robust.

The bank adds that surveys of house builders’ outlook for demand – which have previously been a good indicator of future activity – also appear to agree with our assessment.

It argues that investment in US regional banks is one way to benefit from the trend and gives the following three reasons.

1. Firstly, the fact that house prices are no longer falling should improve investor confidence in the health of banks’ balance sheets, which may ultimately lead to higher valuations.

2. Furthermore, steady or rising house prices should enable some of the sector to release previous provisions against expected losses, which are no longer expected to materialise, which can have a positive impact on profits.

3. Lastly, the stronger housing market should drive higher mortgage volumes for the sector. Indeed, higher-than-expected loan growth could drive an earnings surprise for the sector in 2013, in our view.

11 thoughts on “US housing recovery should underpin economy says HSBC Private Bank”

  1. dutch says:

    Shaun,

    Thanks for your analysis which covers a lot of bases as ever.

    One thing you don’t touch on is the health of the banking system.

    http://online.wsj.com/news/articles/SB10001424052702304428004579353943456367568

    ‘Three of Spain’s biggest banks reported earnings Friday showing that
    despite their cleaner, leaner balance sheets and an improving domestic
    economy they are still paying for the country’s real estate bust.’

    Which raises the point that if expats are leaving then that will create further losses.

    http://www.telegraph.co.uk/news/worldnews/europe/spain/10781350/End-to-Mediterranean-dream-for-90000-Britons-who-left-Spain-last-year.html
    ‘British expatriates are deserting Spain in droves, according to new figures
    from Spain’s national statistics institute ‘

    If only economic growth could be driven by low bond yields alone.

    1. Anonymous says:

      Hi Dutch

      I think the low bond yield equals economic growth game has been abandoned by most of even the most fanatical Quantitative Easing supporters….

      As to the banks in Spain they remain in trouble I agree and a signal of this was given today in the Financial Stability Report of the Bank of Spain.

      “Under credit to the resident private sector, non-performing loans (NPLs) have continued to increase in respect both of households and of non-financial corporations. Along with the continuing decline in credit, this has prompted an increase in NPL ratios over the past year.”

      Also if they were doing so well why was this change in the tax rules to allow an increase in bank capital from deferred tax losses necessary?

      “Therefore, the net figure stands at €68 billion (see Panel A), approximately 60% of which is included in the scope of application of the new tax rule”

  2. Paul C says:

    I used to enjoy holidaying in Spain but budget airlines were no longer cheap and quite strangely the prices didn’t seem to fall for tourists in the downturn. My favourite place, San Sebastian for the Cinema Festival, the tapas and accomodation and parking became more expensive as the GFC continued. Maybe I am reflecting the decisions of expats around their cost of living departure?

    1. Anonymous says:

      Hi Paul C

      As you know inflation and pricing is a field I specialise in and I find this “there has been no inflation but prices are higher” argument around often! According to the Spanish GDP deflator in essence there has been no inflation in the GFC era and I think I recall looking up consumer inflation and it being up 9%. Of course we need to allow for the UK pounds fall in 2007/08 against the Euro from the 1.50 or so peak. If you were unlucky enough to have gone to Spain in March 2009 we were below 1.10.

      Does the currency fall cover your experience or do you think the situation had an extra factor?

      1. Paul C says:

        Yes Shaun, your memory is accurate. The fall of sterling at the start of the GFC did cause holiday exchange rate pain but I also noticed over the years a change in culture in Spain. Debt leverage and consumerism affected the outlook of the people such that it was good to shop, buy sugary products for kids and a plethora of household non-essentials. Formerly they had a Franco era informed thriftiness.
        Interestingly when compared to neighbouring Portugal, far more agricultural and less modern country you can still get an expresso for €0.75 but in Spain it is €2.00.
        it is a bizarre irony to think that having escaped their statist background the new quazi-capitalism of Q.E. economics where the state reasserts itself though identical political parties, supported bankers, increased parking taxes and cliff-edge mortgage contracts. I wonder if the older Spanish think it is really better than the old days?

    2. Anonymous says:

      Many of the expats got cheated with undocumented properties. The Spanish administration know who built them and who ran the administrations, but they mostly ignore their own whilst bulldozing expats homes. Chances are that the Marbella prosecutions are more about knobbling a political rival than clean justice.

      Spain’s economy depended on selling holiday properties to foreigners. The corruption and this response to it is an especially good way to kill the goose that laid the golden egg.

  3. therrawbuzzin says:

    People whom I’ve spoken to reckon that Spanish banks are far worse than has been allowed for, with far, far more in the way of bad loans, especially for mortgages, than has been admitted.

    1. Anonymous says:

      Hi therrawbuzzin

      I agree that there was a lot of can kicking in the Spanish banking sector and have already replied to Dutch with some extra details.

      We got more clues as to the state of play with banks generally with the results from Barclays today with the axe swinging on a lot of jobs and this is a bank which (supposedly) did not need a bailout! Also I note that its Spanish operations are now in the non-core “bad bank”.

  4. dutch says:

    A friend who lives there said that the issue is swept under the carpet but there’s a real sense of burgeoning anger within Catalonia about the profligacy of the national and local govts elsewhere.

  5. Anonymous says:

    Hi Robert

    I agree that the desire for independence in Catalonia poses quite a few economic problems for Spain as well as a political one. Indeed if we use the modern nomenclature rSpain would look a lot weaker without it even if the national debt was equitibly distributed (of course there would be a large debate over what was considered fair!).

    I think that the ECB would have two problems here.

    1. During the Euro crisis it has passed many of the “lender of the last resort” roles to the national central banks.

    2. The EU has made a lot of threats to Catalonia about it not being in the Euro/EU etc. Of course it may shrug them off but this also keeps the ECB passive.

    So the Bank of Spain may find itself with a very difficult balancing act….

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