Editor's Note: Below is a brief excerpt from today's Early Look written by Hedgeye U.S. Macro analyst Christian Drake, with three of our Housing team's seven reasons why housing inventory continues to make lower all-time lows. Click here to get a free month of the Early Look.
Source: TaxRebate.org.uk
1. The Trap of Negative Equity
Approximately 7% of the 48mn owner-occupied encumbered homes in the U.S. are still underwater. The share of those loans with a loan-to-value (LTV) ratio between 95%-124% is approximately 5%. We consider 95% LTV underwater because of the typical 5% transaction cost. Excluding the 2% of loans that have LTVs greater than 125%, we are cautiously optimistic that this source of supply bottleneck will self-resolve over time as home prices continue to rise nationally. Specifically, we expect that within 3 years another 2.4 million homes will re-enter the potential supply pool based on assumptions of 6-7% annual home price increases coupled with 2.5% annual principal amortization. It's also worth noting that most of the homes still underwater are lower end homes and, thus, key to alleviating the first-time buyer supply bottleneck.
3. Builders Catering to the High End
The trend towards building larger homes was consistent from the late 1990s until the great recession. That trend paused briefly in the immediate aftermath of the recession but then resumed from 2010-2015. The reason for this was that entry level buyers had a difficult time accessing credit after the recession. As such, builders catered to the customer they had -- the high end. More recently, however, this trend has begun to inflect with builders building a larger share of smaller, entry-level homes now that underwriting standards are easing on the margin, households incomes have realized protracted improvement and first time buyers are again growing as a share of the total. Construction of new Single-Family homes between 1,400-2,399 square feet was the fastest growing segment, increasing +21% year-over-year in 2016.
5. The Disincentive of Low Rates
Mortgage rates have a marginal impact on some would-be sellers decision to sell. Some potential sellers who purchased or refinanced their homes after the GFC have effectively become disincentivized by the thought of trading a meaningfully lower rate for today's higher rates. For reference, the share of borrowers who could refinance at a lower mortgage interest rate has plummeted from 41% in October 2016 to 16% in May 2017.
