CHICAGO, June 29, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Equity Residential (NYSE: EQR), D.R. Horton (NYSE: DHI), International Paper (NYSE: IP), Berkshire Hathaway (NYSE: BRK.B) and Masco (NYSE: MAS).
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Here are highlights from Tuesday's Analyst Blog:
Good News: Home Sales Mixed
One of the clearest signs that we were in a housing bubble was that the prices of houses got way out for line with rental prices. While on this basis houses are not yet "cheap," neither are they absurdly expensive the way they were a few years ago.
If prices fall too far from here, it will become cheaper to own than rent, and lots of people who are now in apartments will start to buy. Rental vacancy rates have started to fall significantly and in many areas of the country rents are rising, not falling.
The price-to-rent ratio is already at the high end of normal based on the Case-Schiller index, and in the middle of the normal range based on the CoreLogic index. Rising rents will move the ratio toward the middle or even low-end of the range without more weakness in housing prices. The apartment-oriented REITS such as Equity Residential (NYSE: EQR) should benefit from this.
It is existing home prices, not the volume of turnover, that is important. The level of existing home sales is only significant relative to the level of inventories, since that provides a clue as to the future direction of home prices. If there is an excess inventory of existing homes, then it makes very little sense to build a lot of new homes.
It is the building of new houses that generates economic activity. It is not just about the profits of D.R. Horton (NYSE: DHI). A used house being sold does not generate more sales of lumber by International Paper (NYSE: IP) or any of the building products produced by Berkshire Hathaway (NYSE: BRK.B) or Masco (NYSE: MAS).
Turnover of used homes does not put carpenters and roofers to work. New homes do. When new home construction picks up, it could do so in a very big way from the current extremely depressed levels, and the national homebuilders will probably pick up market share as hundreds of small "mom and pop" homebuilders have gone out of business in this downturn.
A doubling in new home construction would still put the level of construction at historically very low levels, and many of the national builders could see their revenues triple or more. For more on the potential of those stocks see (see "Housing: Past and Future").
Existing Home Prices Vital
Existing home prices, on the other hand, are vital. Home equity is, or at least was, the most important store of wealth for the vast majority of families. Houses are generally a very leveraged asset, much more so than stocks. Using your full margin in the stock market still means you are putting 50% down. In housing, putting 20% down is considered conservative, and during the bubble was considered hopelessly old fashioned.
As a result, as housing prices declined, wealth declined by a lot more. For the most part we are not talking vast fortunes here, but rather the sort of wealth that was going to finance the kids' college educations and a comfortable retirement. With that wealth gone, people have to put away more of their income to rebuild their savings if they still want to be able to send the kids to college or to retire.
The decline in housing wealth is a very big reason why retail sales have been so weak. With everyone trying to save, aggregate demand from the private sector is way down. If customers are not going to spend and buy products, employers have no reason to invest to expand capacity. They have no reason to hire more workers.
People pulling money out of their houses was a big force behind what growth we had during the previous expansion. Mortgage equity withdrawal, also known as the housing ATM, often accounted for more than 5% of Disposable Personal Income during the bubble, thus greatly lifting consumer spending. Since the bubble popped, people have been on balance paying off their homes (or defaulting on them through foreclosures).
The comparison of the next two charts shows how important housing wealth is to the middle class. The first graph includes home equity wealth, the second looks only at financial assets like stocks. The upper middle class (50 to 90% income brackets) had 26% of the total wealth in the country in 2007, and just 9.3% of the wealth in the form of financial assets. The value of non-financial assets, mostly home equity, has declined significantly since 2007, and with it the wealth of the middle class.
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