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Investment Ratings Actions

United States upgrade: from neutral to positive

Last Updated: Dec 18, 2012

Old rating: (neutral)

New rating: (positive)

The Global Property Guide is upgrading its investment rating on United States residential property from neutral (3 stars) to positive (4 stars).

Home prices are now reasonable in many states. There has been a large decline in house prices in many parts of the U.S. over the past 5 years. From Q2 2006 to Q4 2011, the S&P/Case-Shiller composite-10 home price index plunged 34%. Of the ten largest U.S. metro areas, Phoenix registered the biggest drop (down 55.5%), followed by Detroit (-44.4%), San Francisco (-41%), Los Angeles (-40.6%), and San Diego (-39.9%).

The relationship of home prices to household income is back to the level of 30 years ago. The house price-to-rent ratio has been falling since 2008. From 2008 to Q2 2012 median rents have been more or less static, according to the U.S. Census Bureau, while house prices plunged, pushing up price/rent ratios.

Rising demand. The number of houses sold (seasonally-adjusted) during the first eight months of 2012 rose 20.8% compared with the same period last year, according to the U.S. Census Bureau.

January to August 2012 houses sales (compared to same period last year):
• Western region: sales up 37.6%
• Northeast: sales up 27.1%
• Midwest: sales up 18%
• South: sales up 13.5%

The ratio of houses for sale to houses sold in August 2012 was 4.6 - down from 6.6 the same month last year.

This rising demand is partly a recovery from an exceptionally depressed situation, but there are also positive long-term trends. The two groups growing fastest are the over-55s and the echo boomers, the grandchildren of the baby-boom generation. The over-55s have a high rate of home ownership. The echo boomers are primed to start buying, having been renting disproportionately or living with parents.

Single family housing starts fell from an average of 1.4 million annually during the 2000-04 period, to 584,900 units in 2011, so the amount of oversupply is now limited.

Delinquency rates stabilizing. In Q3 2012, 42 U.S. states showed a drop in residential real estate delinquency rates. California and Arizona, two of the hardest hit by the global financial and economic crisis, showed the best year-on-year results.

Mortgage market slowly coming back to life. The proportion of home sales financed by new mortgages is now at a 10-year low. But household finances have improved sharply, with debt service ratios returning to pre-crisis levels. The banks’ need for income from originating mortgages has not disappeared, so mortgage credit availability is slowly opening up.

As of October 2012, the average interest rate for 30-year Fixed Rate Mortgages (FRMs) was 3.38%, down from 4.07% the same month last year, based on figures released by Freddie Mac. Likewise, the average rate for 15 year FRMs fell from 3.35% to 3.69%, while the average rate for 5 year FRMs fell from 3.03% to 2.74%.

The recent declaration by the Federal Reserve Board chairman Ben Bernanke that interest rates will be suppressed until unemployment falls below 6.5% and inflation tops 2.5% , and that monthly purchases of $85 billion in Treasury securities and mortgage-backed securities will continue until job market conditions improve, should provide addition comfort to home owners, as will the recovering U.S. economy.


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Investment Analysis Q1 2018: GPG

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