Residential real estate site Zillow.com released a discouraging report on the future of the housing market in the United States. The web site compiles information regarding home prices, mortgage values, tax rates, and other important information and has become a leading authority on residential real estate. Among the findings of Zillow’s analysis is that nearly one-quarter of all U.S. mortgage holders are now underwater on their mortgage loans. Declining home values are of course the culprit and could continue to fall through at least the next year. They estimate that by mid-2010 that number could continue to rise and reach about 30%. This prediction is actually a great deal better than the opinion expressed just last week by analysts at Deutsche Bank (DB) , which claimed that as many as 48% of mortgage holders could be underwater as prices continue to fall through early 2011.
Homeowners are being hurt by price declines. The estimated median value for single-family houses slid to $186,500 in the period, a 12 percent drop from a year earlier and the 10th consecutive quarterly decrease, the Seattle-based real estate data service said in a report today.
“The negative-equity rate will rise and spin off more foreclosures,” Stan Humphries, Zillow’s chief economist, said in an interview. “I see a substantial downside risk to prices and don’t think we’ll see a bottom until the middle of next year.” — From an article by Dan Levy, Bloomberg.com
This analysis certainly puts a damper on many of the housing green shoots that have partially fueled the recent rally in equities. The rate of declines in home prices does seem to be stabilizing, and that is not to be dismissed. However, this report is further confirmation of our bearish stance on the residential construction industry. The twenty stocks that we cover in this group have appreciated an average of 73% over the last six months. However, the significant supply glut of unsold homes will continue to put pressure on these homebuilders. At current sales rates, the supply of homes on the market right now would last about 9.4 months, which is more than twice the average supply level from 2000-2005.
Luxury homebuilder Toll Brothers (TOL) will report earnings Wednesday, and analysts are expecting to see a loss of $.32 per share ex-items. We see no catalysts for a turnaround in TOL or its competitors, and we continue to rate most in the sector as Overvalued.