Ben S. Bernanke’s efforts to revive housing are making real estate bulls even more bullish.
JPMorgan Chase & Co. more than doubled its forecast for U.S. home price gains in 2013 to 7 percent this week, and predicts a more than 14 percent increase through 2015. Bank of America Corp. said last week property values will jump 8 percent this year, up from a prior estimate of 4.7 percent in a report titled “Someone say house party?”
The two biggest U.S. banks are predicting an accelerating rebound as homebuyers and investors rush to acquire a dwindling supply of properties and the Federal Reserve pushes down borrowing costs by buying mortgage bonds. That’s strengthening the economy and sustaining a rally in homebuilder shares after the stocks more than doubled since the end of 2011.
“We still think we are in the early innings of a prolonged recovery in housing and the economy,” said Samantha McLemore, a money manager for Bill Miller’s $1.2 billion Legg Mason Capital Management Opportunity Trust, which has a range of holdings tied to a housing rebound and has gained 20 percent this year besting 99 percent of rivals.
Home prices rose 6.8 percent in December from the year earlier, the biggest gain since 2006, according to the S&P/Case-Shiller home-price index of 20 cities. The measure is still 29 percent below the peak that year after soaring homeowner defaults helped trigger the global financial crisis.
Growth last year was driven by a lack of housing stock coupled with rising demand from institutional investors, including private equity firm Blackstone Group LP, which has purchased 20,000 single-family homes to rent. The number of homes for sale fell 5 percent to 1.74 million in January from the year-earlier period, the fewest since December 1999, according to the National Association of Realtors.
Housing and economic indicators are “showing resilience,” JPMorgan analysts led by John Sim wrote in the March 13 report. The New York-based firm estimates home prices will increase 3.9 percent next year and 3.2 percent in 2015. New-home sales in January saw the highest increase in 20 years.
Fed Chairman Bernanke has sought to bolster the economy with bond purchases each month. While the most recent round has “not done much for mortgage rates” the “resulting reach for yield is now firmly grounded in the housing market,” they wrote.
The average rate for a 30-year loan ended the week yesterday at 3.63 percent, a six-month high, after stronger-than-expected employment growth drove up yields for the government securities that guide home loans. While that’s up from the record low of 3.31 percent in November, it’s down from 6.8 percent in July 2006, according to McLean, Virginia-based Freddie Mac.
Low interest rates, a tight inventory of properties for sale and record affordability are fueling accelerated home price gains, Michelle Meyer, a Bank of America U.S. economist, and Chris Flanagan and Justin Borst, mortgage-backed securities strategists, said in a March 7 note.
“We believe a positive feedback loop has begun, where the rise in home prices fuels expectations of further appreciation and easing credit conditions, which in turn stimulates homebuying,” they said. “It is a powerful positive relationship especially in this environment of historically low interest rates and a Federal Reserve determined to keep policy accommodative.”
Gains will moderate to 6.5 percent in 2014 — revised from a previous estimate of a 7.7 percent increase — and 3.7 percent in 2015, the analysts wrote.
One issue that’s propelled prices has been shrinking supply from foreclosed homes. In 2012, 1.3 million liquidations occurred, about 30 percent less than the bank expected, in part because of loan modifications that let distressed borrowers stay in their houses.
Foreclosures plunged 29 percent last month from a year earlier to the lowest level since 2007 amid increased efforts by state lawmakers and courts to delay property seizures, according to RealtyTrac.
JPMorgan estimates that by the end of the year, 10 percent of borrowers will be underwater, or owe more on their mortgages than the home is worth, compared with 25 percent two years ago. As distressed sales continue to decline and the inventory of homes remains tight, demand for non-performing assets will probably increase, according to the report.
“If home price performance this year and the ensuing years is anything close to these predictions we’ll see a further rally in non-agency residential mortgage-backed securities,” Bryan Whalen, co-head of mortgage bonds at Los Angeles-based TCW Group Inc., said in an interview.
So-called non-agency debt, which includes bonds backed by subprime mortgages, returned an average of about 21 percent last year, according to Amherst Securities Group LP.
“In a more subdued recovery we thought near-term total rates of return could be in the mid-teens and if we see higher numbers we could see total rates of return north of 20 percent,” Whalen said.
Homebuilders, which have rallied 64 percent in the past 12 months, are also benefiting from the shrinking supply of existing property on the market. KB Home gained 30 percent this year, leading an 11-company gauge that’s advanced 13 percent.
“As we look at construction and new-home building get back to more normalized levels, I think the stocks can do better, and that is certainly something that’s driven by consumer confidence,” said Eric Teal, chief investment officer at First Citizens BancShares Inc., a Raleigh, North Carolina-based firm that manages about $5.5 billion.
The Federal Open Market Committee has said the central bank is waiting for the labor market to “substantially” improve before ending its buying of $85 billion in bonds each month.
The number of people filing claims for jobless benefits over the past four weeks dropped to the lowest level since March 2008, according to data from the Labor Department in Washington. The February jobs report showed that hiring in construction jumped by the most in almost six years.
“Everyone knows that housing’s kicking into gear,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania said in a Bloomberg Television interview. “They’re just underestimating the juice that it’s going to provide to the economy,” said Zandi.
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