U.S. housing: sustainable bottom or dead cat bounce?

At Morningstar UK, Eric Landry argues, essentially, that the U.S. housing market is probably bottoming. Regarding the argument that housing prices will plunge again once the “shadow inventory” of foreclosures hits the market, Landry says:

The analysis sounds elegant, but like many elegant-sounding theories it is probably wide of the mark because it improperly categorises bank-owned properties as “new supply” when it’s really nothing of the sort. The overwhelming majority of this inventory was built years ago and therefore is already part of the existing supply. In some cases, it may even already be included (or has been included at some time) in the “for sale” statistics. Authentic new “supply” (housing starts) currently hitting the market is actually quite low. In fact, it hasn’t been this low since at least 1959 (and probably a lot longer, but we don’t have data prior to then)….

Landry goes on to point out that prices in some bubble markets have dropped to the point where they are becoming attractive to landlord-investors:

We’ve maintained for a while that U.S. home prices will find support at levels where investors can purchase the foreclosed properties and rent them back to the people who used to be owners at attractive returns. Prices in many markets are already there. The “15 times annual rent” rule is a back-of-the-envelope method for determining fair home prices based upon the area’s rental rates. By this admittedly simple metric, homes look cheap in many regions. For example, the U.S. department of Housing and Urban Development (HUD) tells us that the median rent for a three-bedroom property is currently $1,697 per month in Riverside, CA. This translates into a fair value of roughly $305,000, or almost 30% higher than that area’s $235,000 current median listing price according to Housingtracker.net.


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