US housing plan creates foundations for market recovery
What will it take for the bear market to end? A low oil price, for a start, would help. An unwinding of frozen US credit markets is also badly needed to get the global lending machine rolling again, but that could take time. And an easing of earnings downgrades for corporate profits is vital.
Arguably the key to a sustained recovery is the US housing market. Signs it has finally bottomed will boost confidence, both corporate and consumer, and underpin a US economic recovery in Alpha’s opinion.
The dire state of US housing is almost unbelievable, especially in Australia where house prices, at least in certain areas, only seem to go up. Average house prices were down almost 15% in May year on year. One in eight US homes is expected to go into foreclosure over the next five years, possibly more if US interest rates keep rising and big companies shed more jobs. The impact that would have on the US economy, if it happens, would be catastrophic.
So it is no surprise the US Senate passed legislation in late July to stem the rate of foreclosures and support beleaguered mortgage funders Fannie Mae and Freddie Mac. Among several measures, the package included tax credits for first-home buyers, other tax breaks, and a US$300 billion program as a funding backstop for Fannie and Freddie.
The package could not come sooner, although subsequent price action on the US stock market suggests investors believe the government action is too little, too late.
Alpha believes the market reaction is very short-term. The housing package should create more confidence in the US mortgage market at a time when there are signs – very early signs – the US housing market is close to, or at, a bottom.
June new home sales in the US, for example, showed a fall of only 0.6% while inventory of unsold news homes fell by 23,000 units, the biggest monthly decline in more than 40 years. Falling home prices, terrible as they are for home owners, are stimulating buyer demand. The US housing market cannot recover until huge stocks of unsold housing inventory clear. It might be starting to happen.
The housing adjustment will continue to be bumpy, but it looks like markets are pricing in too much housing bad news at current prices.
