The US house prices are recovering at a healthy pace, which is expected to provide the American economy with a boost, reveals a study conducted by HSBC Private Bank.
Dean Turner, investment strategist at HSBC Private Bank said the US housing markets is showing signs of strength and the recovery is "ongoing", which, in HSBC’s view, gives it increased exposure to regional US bank shares in the portfolios.
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"Increased lending activity with good margins should boost profitability, and lower provisioning against loan losses should help banks too. Capitalisation has already improved and although regulatory risks remain, we think this should be more of a challenge for systemically important investment banks than for the US regional banks," said Turner.
The fall in house prices was a major factor that contributed to the great recession as residential investment contributed to as much as 5% of GDP in 2006.
Healthy recovery of house prices should improve investor confidence and show up positively on the banks’ balance sheets that may lead to higher valuations.
"In our view, it is important not to underestimate the importance of the housing recovery to the US economy. The rise in consumer confidence and fall in the saving ratio has been instrumental in offsetting the negative impact of rising taxes on consumption so far this year, and we believe that the recovering housing market goes some way to explaining this move. And, in our view, the conditions are in place for this recovery to continue," said Turner.
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By GlobalDataA key factor that has held back the recovery in the US housing market has been that the stock of housing available for sale being too high, according to HSBC Private Bank.
"This was partly the result of the overhang from over investment (too much building) before the crisis, but another key aspect was the number of foreclosed homes available for sale. However, this situation now seems to have reversed as robust sales of existing homes has reduced the inventory of homes available for sale back to pre-crisis levels," added Turner.
The falling supply of homes for sale has been one of the key drivers of the recovery in housing starts in the US for both multi and single-family homes, which have seen a sharp improvement in recent months, reveals HSBC Private Bank.
"Other key factors have been that affordability has improved, encouraged by low interest rates, and a gradually improving jobs market. In our view, interest rates are likely to stay very low for some time yet. Furthermore, US banks’ credit standards are showing signs of easing, and consumers’ appetite to take on extra borrowing appears to be increasing. Thus, affordability and therefore demand should remain relatively robust," said Turner.
Turner also added that the stronger housing market should drive higher mortgage volumes for the sector, and higher-than-expected loan growth could drive an "earnings surprise" for the sector in 2013.
