Pragmatic Capitalism

Practical Views on Money, Finance & Life


Here’s a contrarian view for you.  Credit Suisse says the fears about housing are well overdone.  In their analysis they cite 6 different bullish factors that should help to bolster house prices in the USA:

  • The government now owns or guarantees about 70% of US mortgage debt ($11.5trn), thus any knock-on impact from a fall in house prices should be much lower than in 2007-2008 and the flow of foreclosure onto the market can be managed well (recall that since April 2009, 3.1 million trial loan modifications have been made);
  • Valuation is extremely cheap on all measures (price to income, price to rent, affordability index, rental yields).
  • Delinquency ratios, charge-off and foreclosure rates seem to have peaked.
  • Housing starts are about 1m below trend demand of housing units – based on household formation and replacement demand. The question is: What is the level of excess inventory? The number of unsold new and existing homes have fallen by 63% and 14% from the peak, respectively; if we then assume half the foreclosed property becomes vacant (i.e. half of the 2.3m homes currently foreclosed), this amounts to 2.7m homes, which should take 2 ½ to 3 years to absorb.
  • Distressed sales (short-sales, foreclosures and REO sales) are less than a third of the total, after peaking at almost half in 2009;
  • Housing as a proportion of GDP is now just 2.2%, compared with a long-run average of 4.5%.

Can’t say I entirely agree, but it’s always nice to keep an eye on both sides of the argument….

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services.He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.
Cullen Roche

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