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Monday, April 02, 2012

Wells Fargo on Housing: Better Days Ahead, Prices to bottom mid-year

by Calculated Risk on 4/02/2012 02:59:00 PM

Earlier this year I argued that there was a good chance house prices would bottom this year (I predicted a bottom in Not Seasonally Adjusted prices in March - of course that data will not be released for several months). There are several other analysts and economists who now see prices bottoming this year or early next year.

Wells Fargo economists put out a special commentary on housing this morning: Spring Came Early for the Housing Market

The latest data on home prices also came in a little better than expected, and the survey data from the NAHB/Wells Fargo Homebuilders Survey as well as anecdotal reports from builders and realtors all suggest better days are ahead for the industry.

Drawing definitive conclusions from the winter housing data is perilous. The winter months account for the smallest proportion of the year’s housing activity, and unseasonably mild weather during the winter months can cause the data to bounce around quite a bit from month to month. The March and April data are much more important, and all indications suggest that the key spring selling season has gotten off to a solid start.
We have nudged our forecast for home sales and new home construction slightly higher, as the spring selling season appears to have gotten off to a strong start. ... the anecdotal evidence is hard to dismiss. Most builders and realtors report significant gains in buyer interest and sales. Moreover, the gains are organic rather than incentive induced. Unfortunately, conservative appraisals and tight mortgage underwriting continue to undermine a large number of deals. We suspect that the undertow from these two hindrances will subside over the course of this year, as the fog surrounding shadow inventories lightens up a bit and more lenders come back to the market.
We expect home prices to definitively bottom by the middle of this year, as the backlog of foreclosures finally begins clear. For properties not in foreclosure, prices have probably already bottomed, but should remain relatively low nonetheless given the competition and perceived competition from foreclosures.
Wells Fargo believes the housing recovery will unfold slowly, and they only expect new home sales to increase 12% in 2012 to 340 thousand, and housing starts to increase to 710 thousand (includes multifamily, owner built and more).

It is important to note that Wells Fargo is forecasting a very weak year for housing - just an increase from the weakest years on record. Their forecast would be the 3rd worst year for new home sales since 1963, only behind the 2011 and 2010 - and about half the median annual sales since 1963.

Their forecast would be the 4th worst year for housing starts since 1959. Note: starts bottomed in 2009, and most of the increase since then has been from multifamily starts). The Wells Fargo forecast is for about half the median for annual housing starts since 1959.

Sometimes I see commentary saying there is no recovery in housing, and the commentator then points to the current low level of sales and starts. However, when most people use the word "recovery" they mean an increase from the previous period - not the absolute level of sales and starts. Sales and starts will be weak in 2012, but better than 2011.