Two analysts of the Bank of America Merrill Lynch (BAML) defend what they call their views of great strong conviction for what should happen in the world of housing over the next two years. Chris Flanagan and strategists Gregory Fitter, ABS and MBS say that their views are mainstream step but that recent data had corroborated their theories.
The two argue that house price increases will continue to moderate the skyrocket trajectory, they were on end 2012 and early 2013 will be peak in mid-2016. In second place, as unemployment continues to facilitate, the yield curve will continue to flatten (a longer-run rate if lower, while that shorter term rates increase, relative to one another) and the gap between two-year and 10-year Treasury yields should be zero by the time real estate prices peak. The long end of the curve will be surprising to low yields, encouraged by a soft housing market and low inflation.
The first "great view", that the prices of houses will culminate in two years, it is validated they say with the most recent real estate price income Case Shiller-based model. Graphs 1 and 2 includes the Case Shiller historical and forecast house price index (HPI) and the strategists of the BoA's fair value estimate. This model shows that the HPI will increase top-level quarter 2014 of 155.5 to a peak of 167.3 in the third quarter of 2016. It's an annualized growth of 3 percent to more than 30 months, compared to 11% in 2013 and the rate annualized 9.5% since prices bottomed in the fourth quarter of 2011. Then the price should decrease and not to resume the level of 2016 until 2022 Q2, an annualized rate of growth in prices in more than six years of 0. With this account, the growth rates annualized domestic price between 2014 Q1 and Q2 2022 is expected to reach 1.0 percent.
The authors estimate that the Case-Shiller HPI already exceeded 9.7 per cent valued in the first quarter of this year from the author of fair value estimate and it was 6.2% undervalued when it touched the bottom in 2011, a swing of 16 per cent in assessment in two years. Last time, we observe such a rate of acceleration was in 2002, the beginning of the real estate bubble. Template projects of the author that the prices will be overstated by 12 percent next year end or at the beginning of 2016 and this will eventually lead the decline in the price, probably less than fair value.
The return under fair value reflects what happened before, during and after the crisis housing, but at a lower level of recosting. During the early 2000s overvaluation of housing boom peaked in Q1 2006 at 58.9 percent before prices decreased by 34%, exceeding fair value at the base. It will be very different this time, mainly due to the regulatory framework, including Dodd-Frank, which has been implemented in response to the boom and bust. After peaking this time, they expect the prices stay flat or unchanged for six years, not collapse as it occurred ten years earlier. exactly what the regulatory framework was supposed to do. "From this perspective,"they say, "0% 2016-2022 house price growth seems to us a fantastic result and exactly what policymakers had hoped during the establishment of the new regulatory framework."
Given this scenario, the authors ask what may be the catalyst to increase interest rates. If anything, they have lower rates, by the way, seem even more plausible. "It is difficult for us to see what generates any significant and sustained increase in the volatility of interest rates.
The authors cite also the report can CoreLogic published early July as another justification for their theory of the slowdown in the growth of prices. CoreLogic, with more recent data than that provided by Case-Shiller, watch-year (YOY) price domestic growth may of 8.8%, down 3 percentage points from 11.8 per cent in February, which the authors believe will prove to be the cyclical peak. Annual growth of 11.5 percent had persisted since early 2013. The decline of the "tip" of February began in March and accelerated the downward in May.
Similarly, (MOM) data from month to month annualized slow down temporarily after mortgage rates increased in mid-2013 to level 20 percent at the beginning of the year. While January and February 2014 were exceptionally strong rate of 26.0 and 16 percent respectively growth then began to slow down. Data from MOM for may showed an increase of 1.7% after 2.4% in April. Flanagan and installer says April that CoreLogic and may readings suggest that their own model whereby a 3% rate of growth of prices for 2.5 years followed by 1 percent for the next eight years begins to realize.
Their second point of view that massive yield curve flattening began with the new year and will continue until that spreads from 2 to 10 year zero hit in 2016 is reinforced by the latest unemployment report. Graph 4 shows their vision of the relationship between unemployment and the "spreads" of the two yield curve. The unemployment rate decreased in a fairly linear manner since the peak in October 2009. Extrapolating the decline towards the front, they believe that unemployment will rise to 5% by 2015, and 4% by early 2017. Historically, it was not long after unemployment is less than 5 percent the year of 2 to 10 spreads approach or drop below zero.
Analysts concede concerns of the Fed Chairman Janet Yellen all soft labour market could mean it will be different this time, but they want to their theory. that the decline in unemployment will force the Fed to act and the zero rate will be obtained on the schedule they plan to undertake.
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