Market Outlook - BNP PARIBAS - Investment Services India

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Given that the plunge in existing home sales virtually matched the 16% m/m decline in pending home sales recorded in November, it appears that disruptions to resale volumes stemming from the looming end of the tax credit have already trickled through into the data 2 (Chart 3). As such, barring an unexpected downward correction in pending home sales in December, the extensions to the tax credit programme suggest existing home sales should rebound in January. Who benefited from the tax credit? While the home-buyer tax credit is available for homes costing up to USD 800,000 (income limits also apply), the programme has disproportionately benefited homes in the lower price range of the market. This is likely because the version of the programme introduced in early 2009 was specifically restricted to first-time home buyers, who accounted for 40-50% of total resale volumes in 2009 and who tend to purchase cheaper properties. According to the NAR, the typical first-time homebuyer earned a median income of USD 61,600 in 2009 and bought a home costing USD 156,000. In contrast, the typical repeat buyer earned a median income of USD 88,100 and purchased a home costing USD 224,500. To put this in context, the nationwide median income of homeowners was USD 77,000 in 2008 (data for 2009 are not yet available), while median home prices for existing homes hovered around USD 173,000 in 2009, down from a median level of USD 197,000 in 2008. While USD 8,000 might appear a negligible incentive for some buyers, it actually represents 4.5% of median home sale prices; as such, the tax credit is enough to cover the 3.5% down-payment required on first-time homebuyer FHA loans. Given that 55% of entry-level buyers took advantage of the FHA loans in 2009, the home buyer tax credit clearly had a substantial impact in drawing prospective buyers into the market by helping to partially offset the negative impact of tight credit conditions and labour market uncertainty. As the homebuyers’ tax credit available between January and November 2009 was restricted to firsttime homeowners, it is not surprising to find that buying activity in recent months has been largely concentrated in the lower end of the market. Indeed, according to the NAR, nearly 70% of homes sold in September were priced below USD 250,000. In addition, among existing properties, sales of homes priced below USD 100,000 are up 22.5% from a year 2 Existing home sales are recorded at the end of the escrow period, when a mortgage contract is closed. Because it takes around two months from the time a purchase contract is signed to the time the mortgage is actually closed, existing home sales reflect buying conditions with a one to two months lag. Therefore, the strong resale volumes recorded in November reflected sales contracts which were likely signed in September and October. Similarly, the December reading relates to contracts signed in October and November. Source: Reuters EcoWin Pro Chart 3: Fully Corrected Chart 4: Working Off the Excesses Source: Reuters EcoWin Pro ago, while sales in the upper end of the market remain very slow. Sales of homes priced USD 500,000 and above rose by a meagre 4% y/y. Inventories are easing While housing demand is likely to remain subdued over most of H2 2010, inventories of existing homes available for sale eased further in December, falling by 6.6% m/m to a non-annualised level of 3.289 million, the lowest level since early 2006. However, due to the sharp drop in demand, the month-supply of inventories actually increased to 7.2 from 6.5 previously (Chart 4). While the steady decline in available inventories suggest supply and demand are being brought back into balance, official statistics of inventories are unlikely to capture the full spectrum of the housing stock, as discouraged homeowners trying to sell a house likely stopped advertising their property. They are expected to come back to the market as conditions continue to improve. Given that the tax credit has largely supported activity at the lower end of the market, it is not surprising that the months-supply for homes costing USD 100,000 or less has dropped to around five months, while for homes costing above USD Anna Piretti 29 January 2010 Market Mover 8 www.GlobalMarkets.bnpparibas.com
500,000, the months-supply level of inventories remains 14, double the industry standard of seven months considered necessary for prices to stabilise. Therefore, while high-end prices are likely to correct further, prices are likely to increase at the lower end of the market, consistent with NAR reports of multiple bids for lower priced homes in certain areas of the country. The overall effect of these cross-currents is likely to be an increase in median house prices over the short term, as the sample of available inventories has shifted slightly to the higher end of the market. This is because, unlike the S&P Case-Shriller house price index, the median price for existing home sales is not adjusted for changes in the housing sample. Indeed, median existing home sale prices have so far rebounded at a faster pace than the S&P/Case- Shiller house price indexes or the LoanPerformance HPI 3 , rising by 1.5% y/y in December. In contrast, both the S&P/Case-Shiller 20-cities index and the LoanPerformance HPI indicate that house prices were still below last year’s levels, falling by 5.3% y/y and 5.7% y/y respectively in November. In addition, both these indexes, which are based on a “repeatsale” method and therefore better adjust for changes in the home sales sample, suggest the growth momentum has moderated since the summer. For example, on a 3-month annualised basis, the 20- cities index rose by 2.4% in the three months to November, easing from an average growth rate of 9% recorded between July and September (Chart 5). The post-credit world Going forward, housing demand should rebound in the short term but is likely to stagnate over the second half of this year. The homebuyers' tax credit has now been extended until April (for contracts that close in June) and expanded to include more affluent and existing home buyers, suggesting resale volumes should benefit from a new influx of buyers over the next few months. The NAR expects around 900k first-time homebuyers and 1.5 million existing homeowners to take advantage of the extended programme. However, these estimates appear rather optimistic, as they imply that the second “segment” of the tax credit (December 2009 to April 2010 for contracts that close by June 2010) is even more successful than the first segment (January 2009 to November 2009), when 2 million homebuyers took advantage of the government programme. Supporting the argument of a slower pace of housing demand is the fact that the second segment will be in effect for a shorter time 3 The LoanPerformance HPI is a repeat-sales index that tracks increases and decreases in sales prices for the same homes over time, which provides a more accurate "constant-quality" view of pricing trends than basing analysis on all home sales. This index is used by the Federal Reserve to calculate the value of real estate assets in the Flow of Funds accounts. Chart 5: House Prices Compared Source: Reuters EcoWin Pro Chart 6: The Tax Credit Effect Source: Reuters EcoWin Pro than the first; in addition, the January-to-November 2009 programme likely borrowed some strength from the future, arguing for a moderation in the pace of home sales. On the upside, however, the extended programme also covers existing home buyers (who can qualify for a credit of USD 6,500) and will therefore tap into a section of the market that was previously excluded. Given these arguments, we assume that the extended programme will benefit between 1.8 and 2.0 million homebuyers. Assuming that around 50% of buyers purchasing a resale home will qualify for the tax credit, we estimate that raw existing home sales will total around 3.4 million between December 2009 and June 2010. Given average developments in seasonal patterns, we conclude that existing home sales will rebound sharply over the next few months and peak at 6.7 million (seasonally adjusted, annualised units) in June, before ending the year at around 5.9 million units. Had the tax credit programme not been introduced (both the first and second segments), we assume existing home sales would have eased to a cycle trough of 4.3 million annualised units in March 2009 before rebounding modestly over the second half of last year and into this year, ending 2010 at around 5.3 million units (Chart 6). Anna Piretti 29 January 2010 Market Mover 9 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: GGBs and other peripherals will rem
Page 5 and 6: The subtle changes in the wording o
Page 7: US: Get It While You Can • As the
Page 11 and 12: France: Roaring Consumption • Ret
Page 13 and 14: should be particularly true for the
Page 15 and 16: UK Inflation: Bridging the Gap •
Page 17 and 18: eceive roughly 60/40 weight within
Page 19 and 20: 1.2% m/m in November, partly offset
Page 21 and 22: or absence of competitors in a spec
Page 23 and 24: Japan: Polarisation in Machine Tool
Page 25 and 26: Australia: The Next Step • Data r
Page 27 and 28: US: Post-FOMC Treasury Market Overv
Page 29 and 30: US: Rolling Down the Agency Spread
Page 31 and 32: US: Poor Housing Underscores MBS Su
Page 33 and 34: Fannie Mae has not discussed the in
Page 35 and 36: EUR: Timing the 20Y Point • The l
Page 37 and 38: EUR 3-5bn (new 10y) in February? Co
Page 39 and 40: JGBs: Supply Continues to Weigh •
Page 41 and 42: Table 1: BNP Paribas' Inflation For
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Page 45 and 46: Pricing Date Repo Rate EUR DRI FRF
Page 47 and 48: CNY: Revaluation and FX Reserves
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Page 51 and 52: USD Bullish Signals • USD Trade W
Page 53 and 54: Currency Spot Trade Recommendations
Page 55 and 56: Economic Calendar: 29 Jan - 5 Feb (
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Key Data Preview Chart 7: Change in
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Key Data Preview Chart 11: US PMI M
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Key Data Preview Chart 15: US Non-F
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Economic Calendar: 8 February - 5 M
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Next week's T-Bills Supply Date Cou
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Economic Forecasts GDP Year 2009 20
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Market Coverage Market Economics Pa
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Market Outlook - BNP PARIBAS - Investment Services India

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