March was a good month. The good news is that few, if any, believe a sustainable market rise is on the horizon. Rather, the almost universal view is that the rally from the March low was a classical bear market rally.
I respectfully demur and take the variant view that the March low was of major significance, and as Kass on Real Money has stated, likely a generational low.
Why? Housing. Housing, which was at the epicenter of our economy's woes and, through a variety of recipes (of a derivative kind), nearly bankrupted the world's financial systems. The prevailing and consensus view is that home prices will decline another 10% to 20% and that a swollen inventory of unsold homes will weigh on the industry's stabilization/recovery through 2010.
Frankly, I disagree.
The health of the housing markets is dependent on six key factors:
1. the level of interest rates;
3. the economic situation and outlook;
4. demographics (population growth and household formations);
5. affordability; and
6. the relationship of the cost of home ownership to renting.
With public policy targeted at lowering mortgage rates and stabilizing the jobs market and economy (seen by late 2009 or early 2010), a better backdrop for housing is in sight, but what most observers are missing is the current massive improvement in affordability and a major tilt in favor of home ownership over renting.
As seen by the two metrics below, affordability has dramatically improved:
1. Median existing and new home prices divided by median incomes are now at levels last seen about 10 years ago.
2. Median home prices to disposable income (admittedly skewed by higher net worth individuals) is now at 40-year lows.
If the cost of owning a home is no different than renting a home, then the tax, psychic benefits of ownership, and so forth will result in an improving demand component for housing.
Such is the case today.
Setting the Case-Shiller Home Ownership Cost Index to the Owners Equivalent Rent in 2000 to 1.0 times yields the following conclusions:
* The cost of home ownership in March 2009 is only 13% higher than the cost of renting a home. This ratio compares to a 73% higher cost of home ownership vs. renting at housing's cyclical peak in 2006.
* If we take out the high ownership cost/rental cost cities of Miami, New York City and Washington, D.C., then the national cost of home ownership is now equivalent to renting.
No doubt, a vigorous recovery in housing awaits improving consumer confidence and stability in the employment and economic picture. These conditions are all dependent on the degree to which policies gain economic traction in the last half of 2009.
Nevertheless, the improvement in affordability and the benefit of home ownership over renting holds even more significance over the near term.
I am bullish on housing, and I am bullish on the U.S. stock market. This week is an important one - the market reaction to quarter-end; the ratification vote on Thursday for proposed changes in FAS 157; and the employment report on Friday will tell us volumes.