September 9, 2008
We are starting to see very early signs of potential recovery, with much work still to be done. The US government took a bold step, laying a key cornerstone in rebuilding a strong foundation. With almost half of the country’s $12 trillion in mortgages, these two organizations were simply too large and too
Assessing the US Housing Market
important to be allowed to fail. Additionally, the federal government has created a purchase facility for mortgage backed securities. Both actions taken by the U.S. government are
Rebuilding the Foundation
expected to stabilize mortgage markets, making
by Lex Kerkovius, CFA
credit more available, and at reduced cost. As well,
Repairing The Cracks Early 2007 saw the bursting of the U.S. housing
we foresee carry-over into the broader credit market, with other credit types both more accessible and less costly.
bubble, precipitating a global financial crisis. More than a year and half later, we are still feeling the pain. Will the U.S. housing market rebound? At McLean & Partners, we think it will.
Evidence of Better Times Ahead Just as a newborn baby learns to walk by taking small steps, the U.S. housing market is taking its own small steps according to the following five indicators:
Nothing goes down forever. We believe that the housing market may now be in the initial phase of
1.
Increase in Mortgage Applications
bottoming, as evidenced by the U.S. federal
2.
Stabilization in U.S. Foreclosure Rates
government bailout of mortgage lending giants
3.
Housing Price Stabilization
Fannie Mae and Freddie Mac. But the turnaround
4.
Existing Home Sales
will not be sudden.
5.
Residential Construction
Rather, we believe the
improvement will be a protracted and gradual process.
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Let’s look into these reasons with a little more depth.
1.
Increase in Mortgage Applications
from 7 in May.
Furthermore, the rate of price
The past few days have seen an increase in mortgage
declines has finally begun to stabilize in most cities,
applications, up by 0.5%, for the first time in three
with the U.S. Midwest being a key area of strength.
weeks. The four week average is also stable when
As we expect, there are still pockets of weakness in
viewed in the context of improvement in other
key California and Florida cities, but we have begun
housing indicators.
the process of improvement. Case/Shiller 20 Cities Index
2. U.S. Foreclosure Rates
20.00% 20.00%
Another initial reaction that we are at a bottom is through analyzing U.S. foreclosure rates.
The
15.00% 15.00%
10.00% 10.00%
5.00% 5.00%
monthly number of foreclosures appears to be 0.00% 0.00%
stabilizing at about 270,000. More importantly, the year over year rate of foreclosure has dropped sharply,
-5.00% -5.00%
-10.00% -10.00%
-15.00% -15.00%
soon decline.
-20.00% -20.00% Ja n
-0 Ap 1 r-0 1 Ju l- 0 O 1 ct -0 Ja 1 n0 Ap 2 r-0 2 Ju l- 0 O 2 ct -0 Ja 2 n0 Ap 3 r-0 3 Ju l- 0 O 3 ct -0 Ja 3 n0 Ap 4 r-0 4 Ju l- 0 O 4 ct -0 Ja 4 n0 Ap 5 r-0 5 Ju l- 0 O 5 ct -0 Ja 5 n0 Ap 6 r-0 6 Ju l- 0 O 6 ct -0 Ja 6 n0 Ap 7 r-0 7 Ju l- 0 O 7 ct -0 Ja 7 n0 Ap 8 r-0 8
suggesting the level of mortgage foreclosures could
US Foreclosures Y/Y Change (Courtesy: RealtyTrac)
120.0% 120.0%
Price declines are also stabilizing based on a number 100.0% 100.0%
of other indices. The U.S. Existing Home Sales Index has begun to stop its downward decline. At its
80.0% 80.0%
peak in 2005, this index reported well over 7 million
60.0% 60.0%
homes for sale. Now, that number has fallen sharply 40.0% 40.0%
to under 5 million, and it appears to be stabilizing at 20.0% 20.0%
that level. In fact, sales actually climbed by 3.1% in July.
Ja n0 Fe 6 b0 M 6 ar -0 Ap 6 rM 06 ay -0 Ju 6 n0 Ju 6 l-0 Au 6 g0 Se 6 p0 O 6 ct -0 No 6 v0 De 6 c0 Ja 6 n0 Fe 7 b0 M 7 ar -0 Ap 7 rM 07 ay -0 Ju 7 n0 Ju 7 l-0 Au 7 g0 Se 7 p0 O 7 ct -0 No 7 v0 De 7 c0 Ja 7 n0 Fe 8 b0 M 8 ar -0 Ap 8 rM 08 ay -0 Ju 8 n0 Ju 8 l-0 8
0.0% 0.0%
3.
House Price Stabilization
While U.S. median home prices are down about 12%
7.5
125 6.5
110
from their peak, housing prices are beginning to stabilize. This can be measured by the Case-Shiller 20 Cities Index. In June, house prices showed gains in 9 of the 20 cities where prices are measured, up
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5.5
95
4.5 Jan 01
80 Jan 02
Jan 03
Jan 04
Jan 05
Jan 06
Jan 07
Jan 08
4. Existing Home Sales Since October 2007, U.S Pending Home Sales has been trending sideways. While inventories remain high, they are not expected to worsen significantly. The current level is equivalent to the extreme levels registered in the early 1980’s. In addition, new
95 1.
85 75
3
65 55
1.
45 35
1
25 0.
15
home inventories have begun to fall at an
Jan 92
Jan 95
Jan 98
Jan 01
Jan 04
Jan 07
accelerating pace, with production at unprecedented and extremely low levels. This decline is among the
5.
fastest declines since the 1960’s.
Residential construction has also completed a
Residential Construction
normal correction of about 20%, much like the last seven business cycles, suggesting that we may be nearing the worst levels of this cycle. The Bottom Line Nothing ever runs smoothly, and there will be bumps along the way. As we have noted, the indicators are still showing year over year declines, but the important thing to notice is that the rate of decline has finally slowed to the point where the situation is not likely to worsen. While U.S. New Home Sales data is still showing a downtrend, it is expected to improve soon as a
These are key turning points that we have been
consequence
The
looking for. Remember, the market is forward-
National Association of Home Builders Composite
looking, and these improvements could portend
Index may be showing a bottom, with levels well
better business conditions ahead. As a consequence,
below previous periods of extreme pessimism,
stock markets typically turn higher as final bad
suggesting the potential for a turnaround in the near
economic news becomes evident.
of
stabilizing
confidence.
term.
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More than a year and half after the problems first began, we believe a key turning point is finally being reached in the U.S. housing market. The housing markets were the source of the current financial crisis, and setting the stage for a stock market recovery is the federal government bailout of the U.S. mortgage giants. Stabilization may follow soon. At McLean & Partners, we are ready and prepared for a recovery. During this corrective phase of the market, we have built cash reserves to deploy in the many attractive opportunities we believe will come evident as the market begins its recovery.
McLean & Partners provides independent research and advice to its clients on a fee for service basis. The company is not engaged in any investment banking, underwriting, consulting or financial services activities on behalf of any companies. McLean & Partners’ research reports are for the sole purpose of managing client portfolios on a managed and non-managed basis. The company may engage in proprietary trading to invest surplus corporate cash balances. The opinions expressed herein are those of the author and do not necessarily represent those of McLean & Partners Wealth Management Ltd. The information contained in this report has been obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. McLean & Partners Wealth Management Ltd. is a member of the Canadian Investor Protection Fund, the Investment Industry Regulatory Corporation of Canada and the Investorside Research Association. The Investorside Research Association certifies its members have no investment banking conflicts.
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