Its Back Again—Housing Stimulus Hangover!

By Mark Hanson

BOAML kinda shocked me last week by lowering its resi investment GDP growth forecast by 33%, citing this is “not a v-shaped recovery” and “we must be patient”. Say what?!? For the past two years house prices — on the heels of nuclear-option rates intervention and the new-era, all-cash investor class — have “vee’d” greater than any time in history, even 2003 to 2007. Moreover, years of headlines of “lines around corner”, and “50 bidders on every house” were either on, or never far from, any front page worldwide.

So, now BOAML is back-peddling, saying that we are in the early stages of a recovery and have to be ‘patient’ for the real-deal, durability and escape velocity to take place??? This is twilight zone stuff.

I guess it still doesn’t occur to most that housing had it’s Fed, new-era investor, and liquidity induced ‘short squeeze’, which pulled everybody into the pool at the same time, filled all the pent-up demand and pulled even more forward. And now, just like in 2007 and again following the tax-credit in 2010, the sector is in the midst of a “stimulus hangover” at which time housing “resets to end-user fundamentals”, meaning much lower volumes and prices. We are already seeing the demand destruction, which always precedes lower prices.

BOAML reduced its residential investment’s contribution to GDP by 33% for 2014. However, this is still a best case scenario. Moreover, they failed to include the GDP headwind from the loss of foreclosures and short sales, which require the exact same labor and materials as builders use to start houses and which dwarfed the ML’s 100k starts reduction for years leading into 2014. Lastly, they still need to downgrade Existing Sales, on which the broker commission component to GDP by itself is 60% of total builder residential investment.

Bottom line, if their 9% ‘starts’ downgrade subtracts 33%, or 0.1%, from their resi investment forecast, then when adding in the headwinds from the loss of distressed and demand destruction in Existing Sales, we should be looking at a total 0.3% to 0.5% housing related GDP subtraction when it’s all said and done. Once again, the fact that “foreclosures and short sales are the solution and not the problem” has been lost. That’s alright though, because we will have a chance to revisit the thesis again.

From Michelle Meyer at Merrill Lynch: Will April showers bring May flowers?

We have all been waiting for the weather to unleash stronger economic activity, particularly for the housing market. However, the housing data so far have been less than encouraging. We think it will be challenging to realize average housing starts of 1.1 million this year and are therefore trimming our forecast to 1.03 million. Our trajectory through year end is still up, with starts rising 11% from last year, but the rebound is more muted. Slower growth in starts combined with the weaker pace of home sales suggests residential investment will add 0.2pp to GDP growth this year versus our prior forecast of 0.3pp.

It is important to put the recovery in housing construction into perspective. The turn started in early 2011 and gained momentum at the end of 2012. However, last year growth was weak until the bounce at the very end of the year. The question is whether that bounce was a start of a stronger rebound which just got delayed due to the weather or simply noise in the data. We think the truth is somewhere in between and are therefore penciling in an acceleration in starts, but not at the pace we experienced in Q4 of last year.

We have to remember that while this is not a V-shaped trajectory, it is still a recovery. Housing construction will head higher as household formation gradually recovers, capacity constraints around available lots and labor are resolved and credit conditions slowly ease for homebuyers. But this all takes time, and we must be patient as the market finds its new equilibrium.

Read more at Calculated Risk.