In this piece, we will look at the state of the U.S. housing market, and its outlook for the remainder of the year. A self-sustaining economic recovery is reliant on a recovery in housing, and Bank of America Merrill Lynch strategists believe that after seven years since its peak, the dynamics of the housing market may be headed in the right direction once again. This conclusion stems from several factors: multi-decade highs in housing affordability, improving inventory levels, increased government focus on clearing the foreclosure backlog and record low interest rates.
Let’s start by taking a look at the evolution of the housing market over the past few years. According to information from the U.S. Commerce Department Bureau of Economic Analysis, Haver Analytics, and Merrill Lynch Global Wealth Management Investment Management & Guidance, over the past six decades, consumers on average have spent about 11-14 percent of Gross Domestic Product on residential housing and associated durable/capital goods. But since 2008, when the housing “crisis” began, that number has decreased to approximately 8.5 percent. Simultaneously, home ownership dropped to levels last seen in the 1980s, and consequently, the annual production of housing starts – a key indicator of the housing cycle – is at a 60-year low. Accordingly, national indices of home prices, such as the S&P Case-Shiller Report, show that home prices have declined an average of 33 percent since the cycle peak.
However, it’s crucial to note that housing data varies by region, influencing the collective data. For instance, foreclosure inventory is progressively more concentrated in four key states: California, Arizona, Florida, and Nevada. Surprisingly, among non–distressed properties in many metropolitan areas, there has been an appreciation in value – led by a 7 percent appreciation in Miami (Corelogic, BofA Merrill Lynch Global Research and ML GWM Investment Management & Guidance). With these distressed sales accounting for roughly a third of all housing sales in the United States, our strategists believe the national pricing data may be skewed to these hot spots.
We will likely see an uptick in demand, if the outlook for supply continues to improve. Further supplementing demand are up-and-coming dynamics in the rental markets. After a five-year drought in multi-family housing construction, many people are left with renting as their only viable option, due to displacement from foreclosure and financial limitations caused by credit tightening. The implication of these dynamics is that residential construction will add 0.1 percent to GDP growth this year and continue to grow up to 0.2 percent in 2013, according to Bank of America Merrill Lynch Global Research’s U.S. Economist Michelle Meyer.
While the current supply and demand dynamics may be improving, there is still an impending risk for future defaults and foreclosures. Lately, we’ve seen more policymakers concentrate on addressing the challenge, which in-turn might drive progress. Initiatives that are currently being proposed include expanding the Home Affordable Refinance Program, geared towards less expensive refinancing alternatives, and the Home Affordable Modification Program, aimed at tripling the incentives for principal reduction. One of the possible main ideas currently up for deliberation is known as a “bulk Real Estate Owned-to-rental program.” With this program, investors would be permitted to buy inventory in blocks—likely from Fannie Mae or Freddie Mac, thus curtailing the foreclosure process and then renovate for rental markets.
Key indicators that show potential for recovery in the current housing market is apparent, which can lead to an improved job market, employment rate, and consumer spending. However, it’s important to keep in mind that recovery is not guaranteed and may vary by region. With cautious optimism, it’s imperative to be prepared for fluctuating market dynamics and to re-evaluate portfolios and financial goals annually with a financial professional. In the event that we continue to see a positive shift in the housing market, ultimately, this will support an even bigger commitment to equities in our portfolios.
Raj Sharma is managing director of wealth management for the Private Banking and Investment Group at Merrill Lynch, Pierce, Fenner & Smith Inc., a registered broker-dealer, member of SIPC, and a wholly-owned subsidiary of Bank of America Corp. He can be reached in his Boston office at (800) 926-5579 or email@example.com.
This article is based on “A Look at U.S. Housing: Curing What Ails Us” written by GWIM CIO and Head of Investment Management & Guidance Lisa Shalett and the chief investment officer team and published in the February 2012 CIO Reports. GWM Investment Management & Guidance provides investment solutions, portfolio construction advice and wealth management guidance.
Excerpts from this article originally published in India Abroad on March 30, 2012.