CHICAGO, Feb. 24, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: Sherwin Williams (NYSE: SHW), La-Z-Boy (NYSE: LZB), USG (NYSE: USG), Weyerhaeuser (NYSE: WY) and Berkshire Hathaway (NYSE: BRK.B).
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Here are highlights from Wednesday's Analyst Blog:
Housing Prices & the Economy
The level of activity in used home sales really is not that important in isolation. It is just the transfer of an existing asset, and does not add a lot to economic growth. The one exception to that are realtors commissions. Indirectly, it can help as people will often remodel and redecorate a "new for them" house. That can stimulate some sales for paint companies like Sherwin Williams (NYSE: SHW) and perhaps it is good for furniture firms like La-Z-Boy (NYSE: LZB), but it pales compared to the economic activity generated by a new home sale.
New homes not only need new paint on the walls, but they need the walls. That means lots of business for wallboard firms like USG (NYSE: USG), timber firms like Weyerhaeuser (NYSE: WY) and roofing and insulation firms like the Johns Manville division of Berkshire Hathaway (NYSE: BRK.B). It also means that those firms have to hire more workers, so the employment effect of new home sales goes well beyond the roofers and carpenters actually on the jobsite.
Where used home sales are important is in relation to the inventory of houses for sale. That will influence the future direction of hosing prices. Used home prices are extremely important. As used home prices fall, more and more people find themselves underwater on their mortgages. As long as a homeowner has positive equity in their house, the foreclosure rate should be zero. After all, it is better to simply sell the house and get something for it, rather than simply let the bank take it and get nothing for it.
The more people under water, and the deeper they are, the higher foreclosures and strategic defaults are going to be. A strategic default is when someone has the cash flow available to continue to make his mortgage payment, but simply decides not to, since paying is a just plain stupid thing to do from a financial perspective. If you have a house that could only sell for $150,000 n the current environment, and you owe $200,000 on the mortgage, in effect you have the option of "selling" the house to the bank for $200,000 simply by stopping writing the checks.
Of course that will be a hit to your credit rating, but $50,000 is probably worth a bit of a tarnish on your Fico score. If the difference is only $5,000, then the hit to your credit score makes less sense, and there are lots of non-economic factors (a house is, after all, a home, not just an investment) that come into play.
In January, inventories fell by 5.1% to 3.38 million, but remain above the year-ago level. That puts the months of supply at 7.6 months, down from 8.2 months in December, and as high as 12.5 months in June. While moving in the right direction, it is still a pretty high number.
A "normal" months of supply is about six months, and during the housing bubble four months was the norm. Also, the inventory numbers are not seasonally adjusted, even thought here is a seasonal pattern when they tend to decline in the winter (especially around the holidays) and then increase in the spring.
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