Housing will gradually begin to recover in the second half of this year, David Goldberg, UBS’ home-building analyst, writes in a client note today. That assertion comes with 10 predictions for the year. (We’ll be happy to check back in 2011 and see how he did.)
- “Fundamentals will remain ‘choppy’ in the first half of the year, with conflicting data points making it difficult to ascertain whether we’ve actually reached the trough in housing.” We can’t argue with this one: Data points have turned into a roller coaster.
- “Headline risk, primarily driven by the government’s efforts to extract itself from the mortgage market, will drive the homebuilding stocks down 15% or more from current levels.” Mr. Goldberg continues: “With the longer term path for fundamentals offering limited clarity, we expect the homebuilding stocks to remain quite volatile and extremely sensitive to news flow.” We don’t need to remind investors how far they’ve already fallen from peak levels — or how they bounce around day-to-day!
- “The previous prediction notwithstanding, the government is going to do everything in its power to protect home prices.” Mr. Goldberg says: “In the end, we believe that concerns about higher rates and declining mortgage market liquidity won’t amount to much. In our opinion, the government has continually made it clear that it is working to limit further home price declines given the serious ramifications these declines would have for both consumers and lenders.” Read: Housing is too big to fail.
- “Although we forecast that as many as 7 million foreclosures are likely to occur over the next several years, we believe the pace at which these homes will come to the market will be consistent with current levels. As such, the concerns around the negative impacts of rising inventory levels are overdone.”
- “An improvement in unemployment is the single most important predictor for the longer term health of the housing market—only by focusing on this variable can we truly understand the timing for a recovery.” Yes, but when will jobs improve? Mr. Goldberg writes that UBS expects payrolls will start to recover in the first quarter, followed by a sharp rise in 2Q. Much of this will be driven by the hiring of temp workers, labeled a key forward indicator.
- “An improving jobs picture will drive greater price stability and better demand. That said, given the level of excess inventory, the pace of price appreciation will be below trend for some time.” So buy to live, not to flip for a quick buck.
- “The builders will see sequential improvements in their quarterly results.” They almost have to, given how the sector’s crash left them battered.
- “Given the limited amount of high quality, finished lots coming to market, we expect the builders to increasingly consider purchasing undeveloped parcels, which represent a greater value. This trend will be magnified if conditions start to accelerate more meaningfully in the near term as builders look to rebuild their operations over time.”
- “Although residential construction lending standards might loosen in 2010, liquidity will be insufficient to drive starts towards current consensus estimates.” Mr. Goldberg writes that lenders are reluctant to commit new capital to residential construction. Consensus for 800,000 single- and multi-family starts is “too aggressive,” he writes, putting the figure at between 700,000 and 720,000.
- “The longer term outlook for housing will increasingly dominate investors focus toward the end of 2010.” Does this mean even more obsessing over daily, weekly and monthly data? Perish the thought!
Readers, what do you think? Do you agree with Mr. Goldberg?
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