Have a read on this report/article by Morningstar.
It makes some interesting observations on U.S. resi, it’s a little on the broad side but it does pick through the bear case. I’ve picked & distilled what I see as the important bits below:
“Is this recent strength the beginning of a sustainable bottom, or just a dead-cat bounce? Well, I can say with some certainty that prices are weakening as I write, but not by any more (and maybe even less) than in a normal year at this time. Seasonality is strong in housing, buoying prices in the spring and weighing on them in the later part of the year. In truth, it won’t be until next spring that we have a good idea…
With annual sales currently running at a bit more than 5 million annually, these 4 million-7 million units have the potential to cause some problems if dumped on the market at a rapid rate… Massive amounts of “supply,” coupled with a tight lending environment, the expiration of a government handout, and a shrinking job base, means that prices absolutely have to go down in order to meet a market-clearing price, the theory goes…
The above analysis sounds elegant, but… it improperly categorizes bank-owned properties as “new supply” when it’s really nothing of the sort. The overwhelming majority of this inventory was built years ago and therefore is already part of the existing supply. In some cases, it may even already be included (or has been included at some time) in the “for sale” statistics. Authentic new “supply” (housing starts) currently hitting the market is actually quite low. In fact, it hasn’t been this low since at least 1959 (and probably a lot longer, but we don’t have data prior to then). … let’s assume that housing production posts a miraculous 50% increase next year to 930,000. The three-year total, at about 2.4 million units, will be roughly a million units less than the three-year total that occurred at the 1991 bottom and about 1.5 million less than both three-year periods that occurred at the 1975 and 1982 bottoms. At the same time, there are currently 18% more households than in 1991, 34% more than in 1982, and 56% more than in 1975.
More appropriately, it’s likely the foreclosure inventory represents beginnings of a mix shift as many former owners become renters while some former renters become owners. But at what price are these transactions likely to occur? We’ve maintained for a while that home prices will find support at levels where investors can purchase the foreclosed properties and rent them back to the people who used to be owners at attractive returns. Prices in many markets are already there. The “15 times annual rent” rule is a back-of-the-envelope method for determining fair home prices based upon the area’s rental rates. By this admittedly simple metric, homes look cheap in many regions.”
Now, if you can pick up the cheap financing on offer and take advantage of the tax rebates to put zero skin in the game then it may be possible to get a decent assymetrical pay-off by investing in U.S. housing right now.
Of course, this depends on a number of other factors such as property etc. But the general idea goes something like this:
30-year mortgage rates are very, very cheap right now. Now they may go lower but the risk is greater on the upside and for spreads to start widening going forward.
With an 8% tax rebate and FHA financing (you only need a 3.5% downpayment) you can pick up a $230k property with effectively zero downpayment.
Sure, it sounds a little sub-primey but with zero skin in the game courtesy of the tax rebate and super low 30-year mortgage rates it looks like a pretty asymmetrical pay-off.
