Don't believe the bulls - US house prices will take years to recover
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Associate Editor
David Stevenson Aug 27, 2009
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US property: more bad news to come
Is it time to buy that California condo?
Yesterday's new US home sales figures, up almost 10% in July, were just the latest in the recent run of improving US property market data. And they've got the bulls believing the worst is finally over for the disaster zone of American housing.
But hang on. There's plenty more bad news to emerge yet. And in the long-term, even after prices have bottomed, the new-found culture of thrift among US consumers means it could take a long time for them to return to their 2006 peaks.
Let's take a closer look…
The US home sales bounce is misleading
When you see a sales stat trumpeted as the best in four years, it's worth taking note. The July US home sales bounce, at 9.6%, was the highest since 2005. And this follows the second monthly increase in the average price of US single-family homes (the benchmark housing unit in the US, basically), according to the closely-watched Case-Shiller index.
Even the creator of the index, Robert Shiller, reckons "this is an impressive turnaround". But he's not fooled. He's warning that more foreclosures could soon hit home prices yet again. And this is where we come to the crux of the problem for US housing's immediate future.
Foreclosures have already reached record levels nationwide. But as Mish Shedlock of SitkaPacific Capital Management says, now "the foreclosure crisis could be spreading to parts of the country that had previously been relatively unscathed".
Many borrowers are so financially over-extended and in negative equity (i.e. they owe much more than their houses are worth), that they're already in big trouble. But the real problem is ever-rising job losses, which are about to create extra waves of forced sellers. That will result in hundreds of thousands of extra houses overhanging the market.
Lenders will foreclose on 1.89m homes this year
A number of state governments, along with federal government agencies, are trying to 'help' by stemming the potential foreclosure flow with moratoria. Yet this is only delaying the inevitable, and "also means there's a hidden backlog of home loans in default that could end up in foreclosure", says Shedlock. Moody's reckons that lenders will foreclose on a staggering 1.89m homes this year, nearly a third more than in 2008. Very bad news for prices. RealtyTrac, which monitors foreclosure data, doesn't "see much improvement until 2011". As Shedlock says, "mainstream thought is starting to approach the 2012 bottom I suggested two years ago. At the time no one thought home prices would fall for this long. Perhaps I'll turn out to be an optimist".
Sure, now's a much better time to buy that California condo than at this time last year, when so many experts forecast that prices were about to bottom out. It's cheaper, after all. But that doesn't mean you should be hunting down dollar-mortgage providers just yet - the market could still be some way off its ultimate lows.
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Further, over the last three years, America's consumers have learned some very hard lessons about the dangers of debt overdosing. They've started developing a different mindset – they're becoming thrifty again. So their appetite for repeating the credit spree that forced property prices far too high in the first place is now shrinking.
And the process of de-leveraging, i.e. people paying down borrowings and building up savings, has years to run, as we pointed out a month ago in the magazine: (How to profit as consumers tighten the purse strings). US home values could take many years to return to where they were three years ago.
Time to bank a 70% profit on this 'thrift' stock
On the topic of thrift, all bar one of the stocks we tipped in that story mentioned above have risen, as we'd certainly have hoped with the way that stock markets have performed of late. But one particular tip warrants an update. Online price comparison site Moneysupermarket.com (LSE: MONY), which we tipped at 50p after it had plunged by 70%, has really been at the races. It's up 70% since the tip, with a 15% surge within the last week alone.
The group's interim results announced this month were OK. Revenues and profits were well down, but that was already factored into the share price. One factor behind the jump is that on top of the 'normal' dividend, the company said it would make a special dividend payment of 4.93p a share. And on top of that, the management team was saying the right things about the future, reassuring investors that the "solid start to the year" is continuing and that the latest ad campaign fronted by TV Dragon Peter Jones is "connecting well with customers".
But that sort of share price leap in just six weeks is pricing in a lot of good news, and the shares don't look anywhere near as cheap as they did. Moneysupermarket.com is now selling on a p/e of nearly 19x for this year and 17x for 2010, according to City estimates.
At the time of our recommendation, Jamie Briggs at Noble Research was looking for "a valuation 37% above the current price". Unless there's a 'left-field' bid for the company, which is unlikely with founder Simon Nixon still holding over 50%, the shares seem to have run some way ahead of themselves. It looks like time to take a very fast profit.
To finish, just a word about that special 4.93p dividend. If you sell now you don't collect that, because it doesn't go 'xd' until 16th September, i.e. you have to hold the stock until then to get the payment. But the current price has already risen to 'include' the special dividend, and after that 'xd' date, the share price will automatically adjust down by the payout amount. It's probably not worth holding on until then.
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