Friday, November 16, 2012

Household formation to boost housing starts - assuming government funding stays intact

Goldman is projecting a rapid rise in household formations starting next year, with households forming at a rate of 1.2mm per year and even higher.

Source: GS

As one would expect all these new households, whether buyers or renters, should generate demand for additional housing. Subsequently, US housing starts forecast from GS shows an increase in the next few years (though still below the rates we saw before the onset of the housing recession).

Source: GS

Goldman is not unique in this forecast. The ISI Group for example shows an even more aggressive near-term forecast for housing starts.

Source: ISI Group

It is important to note that these forecasts all assume that government funding of mortgages stays intact. Without the US government support for Fannie Mae, Freddie Mac, and particularly the FHA (see discussion), even the sharp rise in household formation may not by itself lift housing starts. The necessity for taxpayer support of these agencies will continue going forward. There may even be a need for an injection of capital into the FHA, which is currently broke (h/t Greg Merrill).
AEI: - In September, 17.3 percent of all Federal Housing Administration (FHA) loans were delinquent [see discussion on the topic], up from 16.35 percent in August 2012 and 16.78 percent in September 2011. Total delinquencies increased by 77,000 over August, the largest one-month increase since FHA Watch began tracking monthly delinquencies in September 2011.

The September estimate of the FHA’s generally accepted accounting principles (GAAP) net worth is –$28.3 billion, down from –$16.3 billion and –$26.3 billion in September 2011 and August 2012, respectively. The capital shortfall stands at $48 billion (using a 2 percent capital ratio) and $67 billion (using a 4 percent capital ratio). The Denial Dial was reset to −2.61 percent, eclipsing the previous low set in August 2012. The FHA’s estimated net worth on a GAAP basis has declined by $12 billion since the end of FY 2011.
The US Congress and the current administration will have little choice but to keep the FHA afloat. The alternative could be a "political suicide". And with the Fed supporting MBS issuance by the GSEs, the cheap government funding will continue to flow into the housing market. That makes these forecasts for a spike in housing starts in the near term quite credible.
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