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.