By Hook or Crook
The big debate amongst our colleagues the past several weeks has centered around the importance of the housing market in ensuring a strong recovery. In the face of pundits’ claims such as one proposed by A. Gary Shilling that housing prices could be expected to fall another 20%, we have remained adamant contrarians bearing witness to what we see as a Fed that will implement policy to prevent a calamitous housing crisis from worsening by hook or crook.
We can certainly appreciate bearish arguments that reference previous housing cycles and certain current data as evidence for the housing market’s repose. Notably, in the late 70s and late 80s it took over 10 years for housing to recover on a real basis. In extrapolating such historical events, some such as Robert Shiller believe that it might take 20 years or more for housing to recover. While it has become investing maxim that history repeats itself in some shape or form, we cannot fathom such an outcome from happening given the newfound role of the Fed.
When it intervened with aggressive, loose monetary policy in 2001, the Federal Reserve effectively distorted the normal business cycle for good and created out of its ashes a new economic paradigm which centers around Fed control to this day. So while housing bears continue to harken upon historical trends as insight into future growth outlook, we remain simplistic in our approach putting our feet in the Fed’s shoes and realizing that the country can ill afford to wait another 10 years for housing prices to resurrect given other major economic headwinds.
And if not a full recovery then the Fed is likely hoping its policy efforts will at least firm and strengthen housing prices enough to relieve investors of their fear of falling prices and encourage consumer spending on the basis of healthier household balance sheets. We foresee the Fed targeting policy that will engineer greater consumer demand via the ‘wealth effect’ generated by a steadily rising market. And the Fed will do so if not only to fulfill its third mandate, but also follow the keen insight provided by Shiller himself in a recent interview. “Confidence and market psychology are important in promoting consumer spending and growth”. It’s no wonder Laszlo Birinyi has the S&P 500 hitting 1,700 at some point this year. He feels like we do that should economic data show better signs of improvement the market psychology would turn aggressively bullish and possibly mimic the rallies of 1982 and 1990.
Despite sluggish data around single family home sales, other pieces of data point and commentary point to a housing market that is healing faster than most analysts are willing to admit:
- Performance of homebuilders, suppliers: Over the past six months, shares of homebuilder companies such as DHI and MDC, and suppliers like MAS, have performed stellarly, rising 43.71%, 54.97%, and 31.14%, respectively, proving that the Fed’s purchases of MBS’s has put a backstop on falling prices.
- PIMCO turns Bullish: PIMCO’s housing bear, Mark Keisel, turned bullish on housing recently based on more positive data far outweighing the negative and calling for a bottom in the near term.
- Improving data: The CoreLogic House Price Index, which is used by the Federal Reserve and many analysts and was up in March excluding distressed sales, suggests that the housing market is responding to an improving balance between real estate supply and demand and is consequently causing a stabilization in house prices. Data from the first-quarter 2012 Census bureau report on rental vacancies and homeownership shows that average monthly mortgage payments (assuming a standard 30-year mortgage for the median asking sales price for vacant sales units) are now lower than median national rental prices. With ludicrously low mortgages rates below 4%, it is officially a buyers market again for the first time since 1988.
While the housing market has certainly become a conundrum for investors of late and might not fully recover for sometime, we anticipate enough cleanup in the near term to improve prices and jump-start the process. We continue to invest by the simple maxim of “Follow the Fed” who we believe will continue this year with its MBS repurchase program that could possibly give the market the positive shock it needs to climb higher and ensure full recovery sooner than later, by hook or crook.