Analysts Remain Upbeat

More analysts remain upbeat about a housing turnaround — just in the last few hours a half-dozen analysts have made supportive comments of the future homebuilding turnaround:

1) Ticonderoga: "...we do not believe such a low level of sales is the new market reality and would expect a slow, gradual climb upward as we move toward the fall....this week is the nadir for bad news flow from the housing sector."

2) Soleil: "We continue to anticipate the housing recovery to see more sustained improvement in 2011, with local and regional sub-market dynamics increasingly becoming key drivers."

3) UBS: "home sales should begin to recover in coming months with further job market improvement"

Regardless: the bulls on housing are very much on the ropes today. Certain assumptions, like low levels of homes for sale must lead to lower inventories, are clearly being questioned.

1) There is still a significant inventory to work off. There is an argument that building has not kept up with household formation, and will soon bounce back. But there is a hole in this argument. True, we need about 1.7 million total homes constructed every year (1.3 million new households plus 400,000 for replacement and second homes), but as real estate analyst John Burns has noted, we exceeded this for 5 consecutive years from 2002 to 2007; we still have 2 million more vacant homes than we need.

2) Household formations have been way below normal because of the lack of job growth; instead of 1.3 million new formations last year, we had roughly 400,000 and may see only slightly better numbers this year.

3) L-shaped recoveries can last a long time. In local markets that were dramatically overbuilt, it took more than a couple years to recover full demand. Burns notes that Houston's 1983 oversupply downturn lasted 9 years; southern California's early 1990s homebuilding downturn lasted 8 years.

4) the shadow inventory is very difficult to quantify but may be very high. We don't know how much hidden inventory is out there, but Burns estimates there could be 5 million homes; many observors have said that a large percentage of the loan modifications done in the past year will likely also end up on the foreclosure list.

Are there any positives? Yes: Burns notes that owning is now cheaper than renting in many markets.

In Sacramento, for example, homeownership is $44 per month cheaper than renting.

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