From: US GIO

From: US GIO To: Undisclosed recipients:; Subject: J.P. Morgan Macro Skinny: US housing market emerging from the shadows Date: Fri, 21 Sep 2012 14:48:43 +0000 Attachments: 2012-09-21_Housing_market_emerging_from_the_shadows.pdf Inline-Images: image005.png; image008.png; image009.png; image010.png; image01 1.png; image012.png; image013.png; image001.png; image014.png; image003.jpg; image002.png September 21, 2012 US housing market emerging from the shadows 1. The housing market is turning the corner. The housing market bottom that has been forecast over the past several years has failed to materialize. This has been especially true for home prices, which have consistently been projected to rise "next year" (left chart). The recent spate of housing data has been stronger than expected: prices have turned positive; new construction is picking up; and sales of new and existing homes are rising.' Although residential investment has not been the engine of economic recovery it usually is, housing has made a meaningful shift to boosting GDP growth, rather than dragging it down (right chart). EFTA01181204 After years of overshooting, forecasts are now undershooting... Economsts and real estate expels' projections of the S&PCase-Snider Nati o nal Ho m e Pri ce Index (YoY % change) Current Following 2 year year Forecast tivough :2) Actual j 0 -1 -2 I I -3 June 2010 June 2011 June2012 Tine of forecast Source: Puls enom its.. Morgan Private Bank. ...and housing is becoming a boost instead of a drag Residential investment contribution to real GDP growth, %-point 1.5 1.0 0.5 0.0 çrls)hill 11411 9 t -0.5 - -7.0 - -1.5 2000 01 2002 2004 2006 2008 2010 2012 Source: BEA, J.P. Morgan Private Bank Data as of 02 2012. 2. From home improvement to housing construction. After saving a significant amount of cash in the first years of the crisis, households have been spending some of that cash on home improvements since.2 Recently, we have seen an encouraging transition —spending on home improvement gave way to new home investments. The impressive normalization in homebuilders' expectations of future sales suggests further upside in new home construction and sales in the short term (right chart).3 EFTA01181205 Home improvement spending may be moving to buying... Billions of USD, saar (both axes) 160 Improvement. 1400 furnishings. 150 consumer durables 390 _•,. 140 130 120 110 103 Jan-10 Jun-10 Dec-10 May-11 Oct-11 Apr-12 Sep-12 Source: BEA, J.P. Morgan Private Bank. Data as of July2012. ...or at least that's what homebuilders anticipate 380 370 360 360 340 Index, >50 means more "good-than "poor 000s, saar 90 1400 New 1-fa miry 80 houses sold 1200 70 1000 60 800 60 600 40 30 400 Homebuilder expectation of 20 sales in the next 6 months 200 10 0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Source NAHB, Census, J.P. Morgan Private Bank Data as of Sept 2012. 3. The housing market is transforming. The housing bust has led to a drop in homeownership, particularly for young adults (left chart) who cannot afford to buy homes and choose to either rent or live with their parents. The former is why multifamily construction has outpaced single-family construction (right chart). The latter explains why the formation of millions of new households has been postponed, although surely future homebuyers are accumulating cash in the meantime. 4 As employment conditions gradually improve, young adults will begin to live on their own and enter the housing market as a key source of demand. EFTA01181206 Less homeownership is changing the market.. Homeownership rate, % (both axes) 70 44 US population 69 (all ages) 43 68 42 67 41 66 llnAer35 years oltl 40 65 64 63 62 1994 1997 2000 2003 2006 2009 Source: Census, J.P. Morgan Private Bank. Data as of Q2 2012. ...as a new renter population raises multifamily demand Housing starts, 000s of housing units, 3m-avg (both axes) 2.000 1.800 1.600 1.400 1.200 1,000 800 600 400 200 0 1990 1993 1996 1999 2002 2005 2008 2011 Source: Census, Haver, J.P. MorganPrivate Bank Data as ofJuly 2012 1-family structures 500 450 400 350 300 250 200 150 100 50 4. Inventories are falling. The stock of vacant homes that are "ready for sale" has fallen sharply in recent quarters, but some analysts argue that the so-called "shadow inventory" will further weigh on the housing market, leading to another dip in prices. First, the shadow inventory has declined meaningfully (left chart). Second, fewer vacant homes and rising prices suggest that shadow inventory will continue to be absorbed and is unlikely to curb the budding recovery (right chart). Indeed, we expect tightening supply to be supportive of home prices and construction activity going forward. EFTA01181207 The "shadow inventory" is steadily declining... Million units 7 6 5 4 3 2 1 0 2000 2001 2002 2003 2:05 2 006 2007 2008 2010 2011 2012 2013 2015 Source: J.P. Morgan Securities Loan Performance.l.i8A. Data as of 02 2012 ...and tightening supply of homes is pushing up prices YoY % change Million units, inverted Histaica Real estate owned (REO) Projected 20.0 1.0 15.0 10.0 50 0.0 -5.0 -10.0 Vacant housing units for sale (inverted) -15.0 -20.0 2.5 2000 2002 2004 2006 2008 2010 2012 Source: Census, J.P. Mo roan Priv ate Bank. Data as of 02 2012. Existing home median sales price 2.0 5. The foundation of the housing market is now set. However, similar to every other aspect of this recovery, we expect growth to be slower than we are used to. The run-up in house prices during the mid-2000s accelerated economic activity: we received a double bonus from construction and consumers' ability to extract home equity for spending.5 Now, however, this equity extraction channel is blocked, and house prices would have to rise meaningfully to re-open it. We do not expect this to happen anytime soon. A decreasing share of distressed properties is a boost for house prices, and the falling share of investors indicates further normalization (left chart). So, too, does the rising share of households planning to buy (right chart). A housing recovery driven by fundamentals instead of "irrational exuberance" is likely to be mild, but with broad-based indicators pointing in the right direction, the risk of this being another "false start" is very low.6 EFTA01181208 Stock of home and types of buyers are normalizing... % of existing home sales 35 - • Aug 2010 sAug 2011 .Aug 2012 25 - 20 - 15 - 10 Distressed sales Investors Sou ce: NAR, J.P. Morgan Private Bank. ...as households are increasingly willing to buy homes % of consumers planning to buy a home within six months, 3mma 10 - 9 - - 7 - 6 5 - - 3 1980 1984 1988 1992 1996 2000 2004 2008 2012 Source Conference Board. Data as of August 2012 Michael Vaknin Chief Economist, J.P. Morgan Private Bank Jeff Greenberg Associate Economist, J.P. Morgan Private Bank Paul Eitelman Associate Economist, J.P. Morgan Private Bank The S&P/Case-Shiller (repeat sales) home price index has risen year-on-year. Although the median existing home sales price has risen more than 10%, median new home sales prices are down slightly year-on-year (-2.6% as of July). The value of residential construction put in place is up 17.6% year-on-year (as of July). July new home sales were 25% (372,000, saar) higher than a year prior. August existing home sales were 9.3% greater than a year prior (4.82 million, saar). 2 Since 2008, households have significantly cut back on housing investment and consumption spending, implying $1.3tm of cash savings a year (12% of disposable income). 3 New home sales this July were 25% higher than a year ago, albeit at annualize rate of 371,000 sales the pace is well below the historical average (667,000). Similarly, a national survey of homebuilders reached its highest level in more than 5 years, although still more homebuilders consider the market "poor" than "good." 4 Economists at the Cleveland Fed recently estimated that there has been a shortfall of 2.6 million households (based on data through 2011). 5 Home equity extraction has been negative, i.e. implying injection of capital, since 2008. 6 The phrase was popularized by Alan Greenspan's 1996 description of the dot-com boom and stock valuations, and the concept dates back to Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds (1852). Acronyms: BEA - Bureau of Economic Analysis MBA — Mortgage Bankers Association EFTA01181209 NAHB — National Association of Home Builders SAAR — Seasonally -Adjusted Annualized Rate IRS Circular 230 Disclosure: JPAIorgan Chase & Co. and its affiliates do not provide tax advice. 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