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Investment of the quarter: US housing

Two swallows do not necessarily make a summer, but US banks JP Morgan and Wells Fargo are chirpy over prospects for the US housing market. Both reported a surge in mortgage lending in the quarter to September. JP Morgan’s Jamie Dimon said: “We believe the housing market has turned a corner.”
Investment of the quarter: US housing

Two swallows do not necessarily make a summer, but US banks JP Morgan and Wells Fargo are chirpy over prospects for the US housing market. Both reported a surge in mortgage lending in the quarter to September. JP Morgan’s Jamie Dimon said: “We believe the housing market has turned a corner.”

This follows the Federal Reserve’s decision to print new dollar bills worth $40 billion (€30.5 billion), once a month, and use them to buy mortgage debt from the banks. In theory, this will encourage them to make new loans and juice the US economy.

In practice, the US housing market will be the biggest beneficiary. And there is already a feeling of optimism in the sector following five years of pain inflected by rash lending decisions and an average fall in price of 33%. In the second quarter, builders took out permits at a rate 5% higher than in the first and 24% higher than a year ago, according to the US Department of Housing and Urban Development.

Yves Bonzon, chief investment officer at Pictet Wealth Management, is cautiously optimistic, pointing to a gentle rise in house prices across the US this year. The unemployment rate has fallen a little and the rate of US household formation has started to rise. Bonzon believes the Fed’s latest action to reflate asset prices is a game changer, saying it is time to reduce positions in US defensive stocks and back those with potential to grow their dividends.

Private equity firms are already banking on an improved housing trend. Analysts say they have been mopping up US homes in foreclosure to renovate, rent and wrap them into structured products. Sound familiar? Steve Schwarzman, chairman of Blackstone, isn’t worried. He told investors: “I think we are more or less picking another market bottom.”

Turner Investments is one of the savviest backers of growth stocks in the US. In a recent circular it said: “We believe this recovery is the real thing.”

House building shares have recovered this year, but still have plenty of potential. Turner’s picks include substantial builders like Miami-based Lennar, Arizona’s Meritage Homes and Toll Brothers of Pennsylvania. Those who like buying baskets of stocks could look at the iShares Dow Jones US Construction exchange traded fund or State Street’s SPDR S&P Homebuilders.

But anyone tempted to buy US housing stocks – to say nothing of land, mansions or structured products – should think long and hard before committing. This year’s recovery is only the start of what is likely to be a long haul. And there is still a US fiscal cliff to climb.

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