Housing on track to improve, but hurdles remain: Morgan Stanley
Strong momentum in home prices as well as housing activity gave Morgan Stanley analysts enough confidence to upgrade their home price appreciation projections to roughly 7% for 2013, according to its latest global securitized credit report.
Additionally, Morgan Stanley anticipates home prices will rise roughly 5% in 2014 and 4% in 2015, respectively.
"The momentum in most metrics of housing activity is running well ahead of the pace we had expected," said James Egan, Jose Cambronero and Vishwanath Tirupattur, analysts for Morgan Stanley.
The Morgan Stanley Proprietary Index (MS), which provides early looks at home price behavior, was up 1.67% for January and indicated that the positive momentum will continue in the coming months.
For instance, new home sales increased 15.6% in Feb., the highest level since July 2008.
Although mortgage rates have increased, housing remains at historically affordable levels due to high affordability improving labor markets, making a strong case for consumers to be upbeat about the prospects for housing, the analysts said.
Meanwhile, the overhang of the shadow inventory is considerably lower than it has been over the past several years.
For instance, from its peak of 8.9 million homes in Jan. 2010, shadow inventory has plummeted more than 44% to 4.9 million in 2012, the report noted.
How the shadow inventory has ended up declining is another big piece of the puzzle.
"Loan modifications have contributed substantially to the decline, with permanent modifications from Home Affordable Modification Program and other proprietary programs totaling over 3.5 million since January of 2010. Incremental additions to the shadow inventory from newly delinquent loans have come down significantly because of positive survivorship," the analysts explained.
However, shadow inventory declines weren’t uniform across the country.
For instance, in judicial states — where it’s necessary to go through the courts to complete a foreclosure — it takes significantly more time to work through delinquent loans than in a non-judicial state.
As a result, the West has shown the most rapid improvement with a steeper shadow inventory decline, the report noted.
On a separate note, Morgan Stanley analysts are still weary about the finalization of the qualified residential mortgage standard, which they note is crucial for a private-label residential mortgage-backed securitization comeback.
"And thus important for the trajectory of mortgage credit availability," the analysts explained.
Recently, there has been a growing chorus from policymakers, including Ben Bernanke, chairman of the Federal Reserve, calling from the QRM standard to be as expansive as that of the qualified mortgage rule.