Cautious Buyers, Reduced Sales, and Price Pressure in Early 2011
■ Postponing foreclosures only extends housing troubles. We worry that the short-term moratoria on foreclosures from many lenders and servicers will end up prolonging the housing troubles even further. Our sense is that the foreclosure moratoria are serving to a) instill more fear in potential buyers, b) reduce sales in the near-term, and c) lead to pricing pressure early in 2011.
■ Buyers pull back, waiting for resumption of foreclosures. Agents indicate that buyers remain extremely cautious, especially as the continuous news about foreclosures leads to confusion, uneasiness about the market, and further worries about pricing trends. Our buyer traffic index remains essentially unchanged in October from the depressed level seen in September. Buyers tend to be extremely price sensitive and will likely wait for the foreclosure sales to resume.
■ Existing home sales likely to fall by nearly 20% in the short-term. We expect a drop in existing home sales over the next several months, with an absence of foreclosure sales. We expect that lenders will continue their push for short sales rather than foreclosures (a trend that started earlier this year), and which could offset some of the reduction in foreclosure sales. This lack of transaction activity would result in less repair/remodeling activity in the months ahead, as much of the activity takes place in the twelve months after a home sale. This would hurt MAS, MHK, and USG, and to a lesser extent SWK given its more diversified and international exposure.
■ Additional pressure on home prices in 2011, when foreclosure sales will likely resume. We think the likely resumption of foreclosure sales in early 2011 will add even further pressure to home prices, as distress sales will likely make up an even higher portion of overall sales. We continue to expect a 10% decline in home prices relative to the most recently published Case-Shiller statistics.
■ Expect homebuilders to take additional reserves for mortgage put- backs. We estimate that the homebuilders under coverage originated over $200 billion of mortgages from 2005-2008, but that most builders have only modest reserves for additional mortgage put-backs.