Giddy about U.S. housing? Slap yourself

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We pointed out yesterday that rising homebuilding stocks are stoked about recent improvements in the U.S. housing sector. But not everyone is on board with this bullish theme. Brockhouse Cooper argued in a note on Wednesday that the housing market – rather than show any meaningful improvement – will merely bounce along the bottom for some time.

This view comes as a wet blanket. At the moment, investors are nearly giddy with excitement over Wednesday's report showing pending home sales up 5.9 per cent in May over last month, blasting past expectations. It follows Tuesday's Case-Shiller home price index for April, which showed a month-over-month uptick in home prices.

Why is Brockhouse Cooper unimpressed? They note that the percentage of seriously delinquent mortgages is falling, as is the number of new foreclosures, all of which is good news. But banks are sitting on a big pile of foreclosed inventory, presumably in the hope that they can unload the inventory when house prices increase.

When they start selling these foreclosed homes, they'll flood the market with inventory, dampening prices.

"This is a circular process which causes home prices to bounce along the bottom and can only be ended when enough foreclosure inventory is cleared to return to pre-bubble levels," Brockhouse Cooper said in its note. "This is well exemplified by existing home sales inventory, which saw a slight rebound just as housing prices showed growth."

Optimists on the housing market will point out that the median asking rental price is now higher than the typical monthly mortgage payment, a switch that suggests investors could swoop down on houses and buy them up as rental properties or that current renters will recognize the better deal in home ownership.

But Brockhouse Cooper rejects this reasoning as well. The move by landlords, they argue, is on a small scale and works against the benefits of keeping rents high. As for renters buying, they outline four reasons why this won't happen.

One, renters who used to own their homes have been so badly burned by the experience of ownership that they are unlikely to return to the market any time soon.

Two, there is more to home ownership expenses that just mortgage payments. There are also taxes and maintenance costs to consider.

Three, the idea that real estate is a solid investment has been severely challenged with the bursting of the real estate bubble.

And four, the U.S. consumer is still deleveraging, or paying down debt.

"Recent optimism over rising house prices is unwarranted," Brockhouse Cooper concludes. "We expect house prices to 'bounce along the bottom' for several years, as a heavy shadow inventory is slowly cleared. In the meantime, consumers will be locked in expensive rentals as they are either unwilling, or unable, to return to home ownership."