“Stabilization of labor markets is the critical ingredient that eventually leads to an improvement in the underlying fundamentals for residential activity,” says Sullivan. “Without a sustained improvement in labor market conditions, it is unlikely that any notable increase in sales activity will materialize.” PCA sees job losses stopping this quarter, followed by an even period then, early in the third quarter, the beginning of a series of steady quarterly improvements.
Two: Homebuyer tax credits may result in a payback in sales during the second half of 2010, moderating perceived momentum.
The dynamic of tax credits as economic stimuli is at work here according to Sullivan. An acceleration in home sales and the resulting drop in inventory that occurred late last year created some optimism. But, pouring cold water on it, Sullivan says that while economic conditions were not as bad as they were in the first part of the year, the sales mini-boom “may owe a substantial amount of credit to the homebuyer tax credit” and its originally-planned expiration in November. “Tax credits work,” he says. “Tax credits work best when there is an urgency to act before the deal expires.”
But the auto industry shows us, says Sullivan, that tax credits boost sales in two ways: they make sales that would otherwise not have been made and they bring forward sales that would have been expected in the months ahead. Then sales stall and fall back into what he calls a ‘payback’ period.
“The expected payback from the first round will be muted due to the extension of tax credits during the first quarter. Sales will again accelerate in the second quarter as the credits are schedule to expire. Months supply of inventory will be reduced. Then what? Payback.”
Three: Foreclosure activity is likely to accelerate during the first half of 2010, adding to inventories.
PCA expects foreclosures will increase in the first half of this year primarily because of weak labor markets (high unemployment drives up foreclosures), the end of foreclosure moratoriums as lenders work through huge foreclosure backlogs and poor home prices. Of that last factor Sullivan points out that “according to some reports, roughly one quarter of home loans are underwater (the mortgage value exceeds the prevailing home value) and people with such loans have less incentive to keep making mortgage payments.”
Four: Increase in bank possessed properties will hinder an improvement in new home prices.
“As banks catch up and work through the backlogs generated by moratoriums, the possession rate will increase. PCA expects the rate will range between 36 and 42 percent. This implies roughly 1.3 million additional homes will be held by banks during 2010, compared to 871,086 in 2009.
“Banks offer substantial discounts below prevailing market prices to remove the financial liabilities of possessed homes from their books. These homes, some nearly new, compete directly with new homes for the homebuyer, putting downward pressure on new home prices.”
Five: Lending conditions are likely to remain a hindrance during much of 2010.
According to PCA the critical issue facing the economy is not the amount of capital that’s available but rather business and consumer access to it. “It is likely that bank’s aversion to risk will diminish only after charge-offs for loans show a sustained pattern of decline,” according to Sullivan. And that, he says, will probably start to happen six to nine months after labor markets stabilize.
Six: Trigger points may be delayed, suggesting less upside risk compared to consensus.
“Compared to consensus,” says Sullivan, “the potential for slower than expected sales, higher than expected inventories and a weaker than expected pricing environment suggest the potential for a delay in homebuilders reaching the trigger point signal to accelerate single family home building.” v
“A quicker than expected healing.” Maybe.
PCA chief economist Ed Sullivan says flatly that “the recovery in U.S. economic growth cannot be sustained without a stabilization in labor markets and job creation.”
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