Why a Revamped Housing Plan Should Be Government's First Priority

Ever since the financial market's calamities that took place in October 2008, we have been increasingly worried about the state of the housing market. Not only did it further restrict access to credit, but after the events that took place, most consumers have seemingly concluded that they would be crazy to try to buy a house. A popular index of consumer sentiment measured by the national Association of Home Builders plunged to fresh record lows as traffic of prospective buyers slowed to a trickle from October to November.

New home sales came in at an annual rate of 407,000 for November, falling well below the 420,000 consensus estimate. The Northeast and the West ticked upward from October, while the South and Midwest came down a notch. Supply also came down and prices turned slightly higher, likely as a result of changing rates of sales geographically.

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Sales of existing homes hit an annual rate of 4.49 million in November, which also fell well below the consensus estimate that called for sales of 4.90 million. Sales were down across all regions, but particularly in the Northeast, which we had been afraid of. Previously, the Northeast was serving as sort of a (relative) beacon of strength, but it is not apparent that nationwide lack of credit and job losses, particularly in the finance industry, is making a mark. The rate of sales also took a leg down in the South, falling by 200,000 homes to 1.64 million annually. We are now preparing for home prices to start taking a turn for the worse in the Northeast and the South as these markets start to play catch-up with the weaker markets.

For several months, a wave of foreclosure sales were helping to clear inventory, particularly in California, and although there is still a relatively high rate of foreclosure sales, supply built up in November as new foreclosures continue to swamp the market. Total outstanding inventory of existing homes inched up by 0.1%. Although prices continue to fall at a fast pace, supply is still on the rise, insinuating that the housing correction must continue. The average home price of $181,300 is down 12.3% from last year, as opposed to being down 10% year over year in October. In recent months, the rate of foreclosure has actually slowed, mostly as a result of initiatives from some state governments to slow the foreclosure process and help borrowers refinance into more affordable loans instead. However, recent studies show that more than half of modified mortgages re-defaulted after six months, meaning that these efforts are not enough to fix the problem. Also, the onset of a full-blown recession has not made making payments any easier for struggling (and soon-to-be struggling) borrowers.

At this point, there seem to be two factors preventing homebuilding equities from plunging. First was the November 25 announcement by the Treasury that it will guarantee $600 billion worth of Fannie Mae (FNM) and Freddie Mac (FRE) loans. This action substantively lowered mortgage rates, with 30-year loans falling below 5.5%. This should improve credit availability for those looking to buy homes, and allow struggling borrowers to refinance into much lower rates. The second factor is the prospect of a government plan to aid the housing market. Although no potential specifics have been announced by the upcoming Obama administration, we believe they may seriously consider a proposal put forth by a group of homebuilders. They have proposed improving the existing housing plan passed in July by raising the tax credit, allowing down payments with the tax credits, and fixing 30-year mortgage rates at 2.99% temporarily. The plan is very similar to the one enacted in 1975 which arguably had an immediate impact in improving the U.S. economy.

We agree that not only would this plan be effective but also that doing nothing would cause the housing market to continue to slide downhill for some time. The plan would improve the housing market, and would significantly improve the state of the economy as a whole, as stabilized home values would in turn stabilize Americans' spending power. The only issue at stake is that the Fed has so much on its plate at the moment, that one must wonder how much more money it can shovel into the system before the government itself becomes stretched. One may never know that answer, but we believe that a revamped housing plan should be priority number one on the government's agenda. It could save us a lot of grief before we end up having to pay for more disproportionate bailouts.

Those investors who are anticipating a housing market bailout bonanza in early 2009 may want to look to invest in Ryland Group (RYL) and Centex (CTX). Both are well run companies with ample liquidity that also have strong potential upsides at current valuation. Beware that there looks to be only downside risk unless such a housing rescue takes place.

Written by David Urani, a Research Analyst for Wall Street Strategies specializing in the homebuilding, staffing, medical devices, and logistical services industries.

Disclosure: long

Comments

[Bill James:]

Housing can recover with by changing transportation infrastructure policy from Planned to Performance Standards. The typical working family (income $20-50,000) spend $10,300 a year on transportation. That can be cut in half by allowing non-oil based transportation systems access to rights of way. Allow access to any one and any technology that can exceed 126 passenger-miles per gallon (energy equivalent).

Increasing disposable income by $5,000 a year per family is enough to stabilize foreclosures and the housing market.

Building the infrastructure will create about 1.8 million new sustainable job.

Personal Rapid Transit is a technology that can exceed the Performance Standard:
seekingalpha.com/artic...

2008 Dec 25 09:25 AM

[SteveD64:]

I would question the basic need for the large public homebuilders. Their advantage is being able to develop very large tracts of land, 2K,4K,or 6K acres into a large subdivision. I think there are very few locations that are suitable or desirable for that type of development in the next several years.

Most of the public builders will go under or go private. They are better off just JVing with a hedge fund on specific projects than trying to be a public company with all of the expense that goes with that burden.

There is no "moat" around their business. Anybody and everybody can be a builder. No barrier to entry. They will not be able to compete with the local/regional builder who can act faster and knows market better

Wouldn't it be better to offer an incentive tax credit/rebate for a purchase of an existing home within a definite time period. This coupled with a 4.5% mortgage would get a lot of "fence sitters" to act.

The homebuilder is actually contributing to the problem as they are increasing supply in an already overbuilt situation.

2008 Dec 25 09:36 AM

[OldLimey:]

The article and the two comments above illustrate why this sorry drama has years to run. Too many vested interests just will not let asset markets correct to appropriate levels. To determine 'appropriate', think in terms of demand and supply rather than bail-out and manipulation.

2008 Dec 25 10:57 AM

[icandoitdon:]

yes, old limey, you are correct.

funny how people seem to think that rational public policy will get us out of the mess that dysfunctional public policy did so much to engineer.

the uncertainty created by current public policy ensures that there will be no sustained recovery in the housing markets or in equity markets for years to come. there is simply no incentive and no upside to risk taking in this environment. everyone will expect and look for government help. instead of a few significant down years and recovery from a sustainable base we'll slowly continue to sink into the economic abyss.

2008 Dec 25 11:16 AM

[jdett:]

2 things to add


1. The reason that over half of the modified loans have defualted is that the lenders are not modifying to help the homeowner, agian are only geared to help the lender, in alot odf cases the monthly payments have gone up on the so called modified loans ( go to loansae.org )


2. The low rates are good for the homwowners who are not underwater on their homes. If you have equity( who determines that in a declining market) and you can aford the pmt, you can rerfi or sell. The rest do not have that option.

ooops. one more point.
I believe "Walking Away" will be on the rise next year when people realize that they cannot handle the stress any no longer want to put money into a sinking ship (bad investment).

2008 Dec 25 11:39 AM

[jdett:]

2 things to add – with spell check


1. The reason that over half of the modified loans have defaulted is that the lenders are not modifying to help the homeowner, again are only geared to help the lender, in allot of cases the monthly payments have gone up on the so called modified loans ( go to loansafe.org )


2. The low rates are good for the homeowners who are not underwater on their homes. If you have equity( who determines that in a declining market) and you can afford the pmt, you can reffi or sell. The rest do not have that option.

ooops. one more point.
I believe "Walking Away" will be on the rise next year when people realize that they cannot handle the stress any longer and no longer want to put money into a sinking ship (bad investment).

2008 Dec 25 11:42 AM

[tl:]

You've got to be kidding me. You're agreeing with a proposal from the homebuilders??? The homebuilders CAUSED this mess!

The homebuilders overbuilt, causing this housing glut (and crash). Yes, easy access to credit fueled the mania, but the homebuilders still were to ones who built the darn homes! They could have scaled back construction several years ago when plenty of people were warning that a housing bubble was forming. But no, the homebuilders kept building anyway.

Now the homebuilders want to the gov't to "save the housing market"??

Again: are you kidding me?

2008 Dec 25 01:11 PM

[D. McHattie:]

Boy, was I relieved to see comments posted by Oldlimey, icandoitdon and tl!

For a second there I thought I was the only person who viewed the author's suggestions as the self-serving, taxpayer abusive, misguided policies that they are.

When housing prices fall low enough then the market will recover. Just let it fall. Government, lenders, builders, realtors - please go home, we neither need nor want your kind of 'help'.

2008 Dec 25 01:34 PM