The U.S. housing market periodically shows signs of life, but with each resurgence in optimism follows a period of disappointment as expectations rise too quickly. Housing starts remain below normalized levels based on historic data, and the timing of a recovery is uncertain despite improvements across other sectors in the U.S. economy. While the housing market is slowly improving, the outlook and pace of a recovery remains uncertain. Investors looking for housing should look to stocks with indirect exposure due to the risks that remain.
December Results were Mixed
Data released on January 21, 2015 indicated that new starts were up 4.4% in December, a positive swing at year-end. Single-family homes, which had previously lagged apartments, were up 4.5% in the month, the largest increase since September 2012. However the results were mixed. Permits, an indication of future activity, were down 1.9%.
Low interest rates, favorable government policies, interest from overseas buyers, and affordable prices should have all come together to make the housing market one of the first to recover. However, housing starts are lackluster. In the chart, note that while starts are on an upward trend, they are still at historic trough levels when looking at the data back to 1959.
The market should be stronger by just looking at mortgage rates. Rates have continue to decline over the past year, especially on 30-year fixed rate mortgages (FRM). Thirty-year FRMs are down to 3.66% from just under 4.5% in January 2014 (see following chart). The problem is not the price of money, but the unwillingness of banks to soften the lending standards to those without the most perfect credits.
Tight Mortgage Policies at Banks
Lending policies remain tight at banks, and they are still selective on mortgage lending. The large penalties most banks had to pay after the crisis has caused increased caution in loan standards. This continues to weigh on the resale market and on new starts.
Tight credit is a big problem for the housing market. Unless the buyer has outstanding credit, finding a loan is difficult. This is despite low interest rates, and banks looking to invest their money. Many banks are increasing loans in other parts of the business that have less regulatory risk. Currently, the new regulations require that if a bank errors in a loan it underwrites, it must repurchase those loans.
Fannie & Freddie Relax Standards
The Obama Administration is implementing new policies to try and loosen up the mortgage market. Fannie Mae and Freddie Mac recently adjusted lending standards for packages of mortgages they back. The new policy allows for down payment requirements as low as 3%. Also, to address the threat banks could face from having to repurchase loans, Fannie and Freddie have more clearly laid out what issues would trigger an event.
The FHA also took action and cut the annual mortgage-insurance premium to 50 bp to 0.85%. HAMP was also extended beyond 2015 as the current backlog to extend repayment terms is still over 200,000.
While these actions are somewhat marginal, the government lacks significant levers to pull. Interest rates are already low and concerns remain in the market from the housing bubble. That said, these actions and a rebounding economy could be enough in 2015 to act as the catalyst for a more robust recovery in housing. Some markets are showing positive signs on the margins.
Marginal Data from Redfin is Positive
Data from Redfin, a real-estate broker, indicates that 35% of homeowners are renting out homes prior to selling versus 39% in 2013. This shows increasing confidence in current prices. Data from the same firm shows that only 11% of homeowners in its market had negative equity in November 2014 compared with 19% in the previous spring. This increases homeowners’ confidence in the market and increases the likelihood they look to trade-up to pricier homes.
Stock Ideas to Play Housing for 2015
While the timing of a recovery remains uncertain, investors looking to find stocks with housing exposure to benefit from a recovery should look to mortgage writers and related retailers. A financial like Wells Fargo (NYSE: WFC) or Bank of America (NYSE: BA) will benefit when the number mortgages they underwrite starts to increase. Home improvement centers like Home Depot (NYSE: HD) and Lowes (NYSE: LOW) should also benefit from an improving housing market and a stronger retail outlook for 2015. Even Target (NYSE: TGT) benefits when housing improves, since people that move purchase new home related products. Homebuilders are a more direct way to gain exposure to the market. Each one has a certain profile, so investors should dive into this a little deeper to understand geographic and segment exposure.
The Outlook Remains Uncertain
Analysts have a wide range of views on housing recovery for 2015. While some expect double-digit increases, the more common view is for growth in the single-digits with some room for an upside surprise. Investors should continue to closely watch the data as an economic barometer, but also to time entry into housing related equities. Investors with a longer investment horizon, can look to invest in housing related stocks that should increase in value when the recovery does finally occur.