BAML just released “Housing Heats Up” which basically offers a positive take on the national housing picture.

The authors present an improving outlook based on greater momentum, dropping inventory, and greater credit availability. For 2012, prices will finish up 6.4%, and in 2013 they expect prices up 4.7% nationwide.

Momentum is described as a self-fulfilling prophecy. As prices start to tick up, home buyers have more confidence in the strength of the market, and more of them believe in the rally.

Inventory is down to 2001 levels with only 4.8 months of inventory. There are limited sources of new inventory:

  • New Construction – Has ticked up but so have sales, resulting in no real impact on inventory
  • Distressed Properties – Nationally, foreclosure inventory is closely linked to states with a longer, judicial foreclosure process. REOs are at 2007 levels. Short sales have kept a lot of homes out of foreclosure.
  • Turnover – “Resales” only add to inventory if the seller is an investor, a second home owner, or switching to renting. If there is an increase in inventory from turnover it may come from institutional investors who are currently renting out properties they acquired.

Credit is the most important factor according to the report, specifically lack of it. Major developments:

  • New guidelines from the CFPB set a clear definition of qualified mortgages that are “safe” to underwrite based on debt to income (43% tops) and no risky features. The result should be prime borrowers obtaining mortgages more easily while subprime borrowers most likely will have less sources of credit
  • There is also a settlement involving major mortgage servicers which should free up servicing capacity and could lead to more refinancing activity.
  • BAML announced an agreement with Fannie to allow them to move 941,000 loans off of their books and add more capacity to the system

Affordability is an important headwind. A pickup in inflation and higher mortgage rates may lead to price deceleration starting around 2016.

Graph of Housing Affordability Index (Composite)

The analysis does not delve into regions or local real estate markets like NYC.

Momentum is a tautological statement. In NYC my sense is that there is skepticism from many buyers about recent price gains in the NYC area. However, as those gains presumably continue, more will accept that prices are indeed rising. In addition, other factors could lead buyers to jump in including mortgage rates ticking higher.

The inventory situation seems to mirror NYC. In October, when Manhattan apartment inventory was at 5,847, the absorption rate was stated as 5.9 months. That number was reported as 4,749 as of the end of December, so presumably the supply is closer to 4.9 months now, similar to the national figure cited in the ML report. I have heard that there are new developments coming in 2013 but not enough to move inventory significantly higher. New York City, specifically Manhattan, never really had a significant number of distressed properties and many properties city-wide headed for foreclosure, have ended up as short sales. The resale / turnover supply could be thinner in this town since we have a much higher proportion of high income individuals who might require even greater long term gains to offset the higher cap gains rates and lower deductions.

The credit picture is interesting. In theory I would think that New York should be a better market for underwriting since the market was more resilient than most in the downturn. However, in my personal experience I find that some national lenders, specifically those not based in New York, seem to be a bit conservative about lending in New York. Whether or not that is true could be something for a future blog entry. Regardless, loosening credit should be a factor here as some have hesitated to trade out of their homes into new ones for fear that they won’t qualify for a mortgage on a new home.