MICHELLE MEYER: The Housing Market Isn't Developing Into A Bubble (ITB, XHB)

Home prices have begun to gather steam. Economists expect prices to rise 8% in 2013.

But some are anxious about another housing bubble. Robert Shiller has said that some markets like Las Vegas look frothy.

In her new list of four hot housing topics, Bank of America economist Michelle Meyer explains why she doesn't expect a housing bubble this time around.

She notes that valuation, price expectations, leverage, and investor speculation do not support the bubble case. "We believe in the housing recovery," wrote Meyer.

She elaborates on her skepticism toward a housing bubble, which is just one of four hot housing topics that Meyer thinks investors need to watch.

1. A new housing bubble is not emerging.

Rising home prices have got some people worried about a new housing bubble, but Meyer thinks this isn't going to happen, for four key reasons.

1. Valuation – Meyer says home prices are undervalued.
2. Expectations – Another feature of the housing bubble was the "expectation" that home prices would only go higher, this seems to be more moderate this time around.
3. Investor speculation – While there is investor speculation in the market, there isn't an overwhelming presence of "less sophisticated investors" with "irrational expectations."
4. Leverage – Credit conditions are tight. "90% of lending is backed by the government, and average FICO scores for new purchase loans remain exceptionally high."

Source: Bank of America Merrill Lynch

2. The argument that institutional investors and international buyers are driving the recovery is a myth.

One of the arguments being made against the U.S. housing recovery is that it is being driven by institutional investors and international buyers. But this is a myth according to Meyer, who writes that investors accounted for 22% of Q1 sales and foreign buyers only 2%. 

"In certain markets investors and international buyers play a bigger role. Investors buy a disproportionate share of distressed properties, making them more relevant in markets with high delinquencies. Similarly, in big cities such as Manhattan, Miami and San Francisco, international buyers are a much larger share of sales." 

Meyer writes that primary homebuyers are still the largest share of the market, though access to credit is still an impediment.

Source: Bank of America Merrill Lynch

3. Renovation spending has been declining, but should get revised higher.

Despite Hurricane Sandy and better housing fundamentals, renovation spending has declined sharply between November 2012 - March 2013. Meyer believes that Census data will be revised higher.

This, she says, is because of Hurricane Sandy.

1. Sales of building materials increased 9.1% in Q1.
2. Home Depot transactions were up 8.6% on the year in the quarter ending January. Revenue also increased at building material companies like Masco and Owens Corning.
3. An index measuring construction permits for remodeling homes, the BuildFax Remodeling Index, jumped in January and February.

Source: Bank of America Merrill Lynch

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