John Morrissy
Sun
U.S. housing prices are headed for a double-dip decline that will hurt related equities which have already priced in a recovery in the sector, CIBC warns.
“Many companies will be affected,” said Benjamin Tal, senior economist of CIBC World Markets, who declined to mention specific names but argued that sectors from forestry to banking could be dragged into the downturn.
The reason, he said, is that any current stabilization in U.S. housing is more a function of a badly damaged market and the distorting affect of temporary tax incentives than evidence of a sustainable rebound.
“We anticipate further weakness ahead as supply continues to outpace demand, mortgage rates head higher and the government’s generous homebuyers’ tax credit finally expires,” Tal said.
The “shadow inventory” of housing is what worries Tal most, and has him calling for another decline in prices of five to 10 per cent over the next two years.
While conventional inventories are trending lower, there are close to two million mortgages that are more than 90 days delinquent, nearly half of which will end up in foreclosure.
Add another 2.3 million properties that are already in foreclosure to existing properties on the market, and you have inventory totalling more than eight million units, a record high 16 months of supply.
Even more staggering is the fact that 10 million households now find themselves in a “negative home equity” position of worse than minus 20 per cent.
In other words, many people’s homes are worth at least one-fifth less than they paid for them during the subprime-led housing bubble.
Considering the ease with which U.S. homeowners can walk away from their mortgages, “strategic defaults” — or failing to pay when one could — are a very real option, Tal said.
“In six months from now nobody will be asking what a strategic default is. Everyone will know.”
With 24 million Americans now out of work or underemployed, “it’s crazy to call for a recovery in the housing market in this kind of environment,” Tal said.
“Our advice would be to be defensive at the moment. I would definitely go with defensive big names that pay dividends.
“Anything that is related to the housing market directly or indirectly will disappoint in the second half of this year.”
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