Lunch & Learn: The State of Housing

As housing supply dwindles, affordability concerns grow while competition heats up the market. This Lunch & Learn will examine the current state of housing, featuring experts who have an eye on the market.

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Sterne Agee: Housing demand will rise in 2014 on wider credit, improving economy

Builder analysts optimistic on housing starts and housing turnover

Homebuilder analysts at Sterne Agee are optimistic about 2014, saying wider credit availability and an overall growing economy will drive housing demand upward.

"We see 2014 as a positive year for housing starts and housing turnover with a caveat that the timing of certain financing catalysts is uncertain," says Jay McCanless, an analyst with the Birmingham, Ala.-based brokerage firm. "We believe the notion of continued job growth, the real lack of housing inventory, and an improving economy as measured by GDP and the index of leading economic indicators are reasons to invest in the homebuilders."

“We view an expanding financing environment as another potential catalyst, albeit with an uncertain time line,” McCanless added.

Despite concerns from elsewhere in the industry that interest rates will be inching upward as a result of the QE3 tapering and new qualified mortgage rules, McCanless foresees there being more, not less residential mortgage financing available. The Federal Reserve recently announced it would begin to scale back on monthly purchases of mortgage-backed securities and Treasurys as part of its monetary policy supporting the economy. On the one hand, its a sign of confidence in economic recovery, on the other, the price of mortgage lending will increase without the artificial suppression.

"Since the timing of relaxed mortgage underwriting standards is uncertain, we are forecasting average yearly order growth of 8.5% for the upcoming quarter, versus the consensus growth estimate of 11.3%," he says. "For the full-year 2014, our average order growth estimate of 16.4% is almost 230 basis points above the consensus forecast since we expect financing availability to grow through the year and create demand."

McCanless also says he doesn’t think the more rigid QM rules will have as much effect, because mortgage originators are already underwriting to tighter standards.

"Current mortgage underwriting standards are tighter on average than the qualified mortgage rule from the Consumer Financial Protection Bureau, which is set for release on January 10, 2014. As of November, the average debt-to-income ratio for completed conforming mortgages was 41% versus the 43% mandated by the CFPB's QM," he says.

McCanless says that he could not quantify the possible demand increase if the average DTI rises to 43%, but qualitatively, he anticipates implementation and a live evaluation of the rules may widen mortgage availability as originators learn the limits of the new strictures.

McCanless says he thinks homebuilder D.R. Horton (DHI) is particularly well positioned to take advantage of the 15-20% neighborhood growth.

"We believe the lack of open communities has hindered sales and unit order growth for several builders during 2013, and we estimate community count growth could resolve some of these issues," he says.

Many forecasters expect home price increases will slow to single-digit percentage increase over the next 12 months, which could shore up sales and offset the cost of mortgage rate increases to come.

But many are worried that the upswing in housing may be about to stall out, owing as much to outside forces as anything else.

David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said that monthly numbers are living on borrowed time and the boom is fading fast.  

"The key economic question facing housing is the Fed’s future course to scale back quantitative easing and how this will affect mortgage rates. Other housing data paint a mixed picture suggesting that we may be close to the peak gains in prices," Blitzer said.

"However, other economic data point to somewhat faster growth in the new year. Most forecasts for home prices point to single-digit growth in 2014," he added. 

3d rendering of a row of luxury townhouses along a street

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