June 1, 2015

High end housing will do well in this economic recovery

On Fast Money: Halftime Report, Scott Wapner asked why all the panelists were unanimously bullish on housing. The gang gave a number of reasons: rates won't rise too rapidly, household formations are climbing, an improving labor market and pent up demand were among many factors. 

Respectfully, I hold to a different and more cautious view:

  -  While the high end will benefit from an "exclusive" economic recovery that has aided the well-to-do -- higher home prices have sowed the seeds to reduced affordability and will hurt mid-level priced housing sales activity going forward. (The issue has not been the cost of capital or the level of mortgage rates for years).

  -  Interest rates have to only rise slightly to adversely affect housing, as many are locked into low adjustables and teasers, so they are less likely to "move up" to larger and more expensive homes as they can no longer replace low-level mortgage rates. Mortgage credit is no longer freely available (as was the case eight years ago) as mortgages standards having been raised materially, so yesterday's no doc/lo doc mortgage of $250,000 (rates low or zero) is today's equivalent to a $450,000 mortgage (when normalizing the "terms").

I would avoid housing-related securities.