Home builders, which are starting to see nascent signs of a recovery, have two looming problems: a large “shadow” REO inventory to compete against, and FHA premium increases, according to a new research report from Credit Suisse.
Credit Suisse estimates there are 6.6 million homes either 30 days or more delinquent, in foreclosure or in REO inventory. That, along with the current supply of homes listed by the National Association of Realtors, brings total inventory to 8.9 million homes—a 23 months' supply. “We believe this overhang of distress remains a significant risk to any type of housing recovery,” writes lead CS analyst Daniel Oppenheim.
Lower inventory—the result of a slowdown in the foreclosure process—had previously boosted buyer urgency, “which we think may be artificial,” Oppenheim notes.
With the robo-signing settlement now final, more REO units will exit the “shadow” stage and hit the listing market.
“Once supply returns; however, we think buyers may become more patient and cautious with more options, a potential headwind to this urgency as buyers gain a better sense of market dynamics,” he says.
Similar to the dearth of supply in distressed properties, builders have reduced inventory as well. But given the recent boom in buyer traffic, the large, well-capitalized public homebuilders should reverse this trend. Credit Suisse increased its projections for the builders' year-over-year new home order growth to 18% in 2012 and 19% in 2013, compared to previous estimates of 11% and 15%, respectively.
Oppenheim noted that the increase is due in part to public builders taking more market share from smaller, private firms. CS projects total housing starts to rise 12% in 2012 and 15% in 2013.
“However, this would still leave 2013 orders 64% below peak levels, so we could see upside to our estimates if the recovery accelerates faster than we anticipate,” he writes.
Also of concern to homebuilders is the upcoming increase in FHA premiums. CS estimates that FHA mortgages account for 40% to 70% of loans used to buy a new home. According to figures compiled by research firm Housing Intelligence,
The premium hikes on FHA loans will increase the total monthly mortgage payment by approximately 2.2%, or $26, for a typical borrower purchasing a new home at the average selling price of $217,000 with a 30-year, 3.9% mortgage, Credit Suisse estimates.
“We believe this impact is modest enough to not disrupt the improvement in traffic, but note that many first-time buyers are currently stretched,” Oppenheim wrote.
