Tags: JPMorgan | BofA | Housing | Recovery

JPMorgan, BofA See Imminent Housing Recovery

Thursday, 05 April 2012 12:02 PM

JPMorgan CEO Jamie Dimon sees the housing market as a buy, despite the huge shadow inventory of foreclosures. Meanwhile, a Bank of America senior economist believes that home renovation spending is a bullish sign.

In his annual letter to shareholders, Dimon bluntly sees housing as “all signs flashing green,” citing numerous trends in its favor. “The turn is coming if it is not here already. We don’t want to be blindly optimistic, but the facts are the facts,” Dimon said. The letter appears on the Calculated Risk blog.

Among the drivers will be population growth, Dimon explained. The United States has added 3 million people a year over the past four years, he said.

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That means 30 million more Americans in a decade. JPMorgan economists predict household formation will rebound to 1.2 million units a year as jobs come back.

Nevertheless, only 845,000 new units were built each year over the past four years, Dimon points out, and a quarter-million homes were destroyed.

“The growth of new households, even at a reduced rate, has been able to absorb all of this new supply, and more,” he explains. The current inventory of single-family homes for sale could be absorbed in six months, according to JPMorgan, half the time of two years ago.

Dimon also expects the shadow inventory of homes in foreclosure to continue its declining trend, and he points out that renting continues to be more expensive than buying. “Relatively high rental prices can be a precursor to increasing home prices,” Dimon noted.

A recovery in the housing market signaled by increased spending on home renovations is a bullish signal for the sector and thus for the whole economy, says Michelle Meyer, U.S. economist for Bank of America Merrill Lynch.

Construction spending is the usual focus, but spending on fixing up homes also matters, Meyer told Bloomberg TV in an interview. "That's the often overlooked sector of the construction market because historically it's a smaller share of construction and it tends to be a lot more steady.”

As it is now, renovation is actually a larger part of residential investment, compared to new construction, Meyer noted. Over time, however, the fixer-uppers will feed back into the overall sector.

First, it puts construction workers back on the job now, working on renovation projects. But renovations can be seen as a kind of leading indicator. “We’re going to see household formation return. We’re going to see move up buyers come back into the market. This is going to happen slowly, but we do think that it will be on an upward trend,” Meyer said.

“That means there is going to be more housing turnover. More housing turnover means more construction, which supports GDP growth,” she said.

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