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Investment Manager Talks Housing Upturn, Securities Issues

All the fundamentals are in place for a housing upturn--if pent-up demand can actually translate into buyer presence, says one investment expert.


Daniel Dektar, chief investment officer at asset management and advisory firm ""Smith Breeden Associates"":http://www.smithbreeden.com/, spoke at length on the housing and securities markets in an interview at ""The Investment Fund for Foundations'"":http://www.tiff.org/Default.aspx most recent Investment Forum.

Dektar notes there are a number of big factors pointing to an upswing in the housing market, including a drop in excess supply (currently estimated at 1.5-2.0 million and falling), the affordability of purchasing versus renting, and the slow loosening of credit standards to workable levels. However, demand hasn't been felt as heavily as one might expect at this point, he says.

""Of course we haven't had a lot of new construction, and household formation has been much lower than would be suggested by employment,"" Dektar says. ""I suppose this means kids are moving back in with their parents and just not setting out on their own as fast and maybe parents are moving in with their kids as well. But either way this suggests pent-up demand.""

One upside is the steady rise in prices witnessed over the last year and anticipated for the next few years. Smith Breeden predicts a 10 percent increase in prices within the next three years--though Dektar admits the timeline for that increase is going to depend largely on supply issues from market to market.

While a price increase is welcome news for a nation still getting back up to normal levels, the results are harder to predict, Dektar says.


On one hand, higher prices drive down the ""subjective cost"" of owning a home--that is, the expectation of appreciation makes a home more attractive for buyers-to-be.

""So, if house prices are going up 10 percent a year, it doesn't feel like it costs anything to live there and your speculative bubble can grow,"" Dektar explains. ""When house prices are going down 10 percent a year, it makes the cost of the house look like 15 percent a year instead of 5 percent ... Now we're climbing back out of that hole where people though housing prices were going down to where more and more think they're going up.""

While perceived appreciation doesn't factor into affordability statistics, it's sure to play a part in driving up demand, Dektar says.

On the other hand, rising prices give today's underwater homeowners incentive to ride out their mortgages until they can make a profit--good for them, but bad for future supply.

""People aren't selling houses when they're underwater because they don't want to write a check to sell their house. As people get out from underwater, their houses come on the market,"" Dektar notes.

In addition, there are homeowners who may want to relocate and are simply waiting for prices to improve before putting their homes on the market, further adding to the excess supply and potentially throwing off price gains. Then, of course, there is the looming shadow supply of seriously delinquent loans and foreclosed homes.

Turning his focus away from the state of housing itself, Dektar also offered some insight on housing-related securitized credit. While commercial mortgage-backed securities (CMBS) issuance seems to be bouncing back from the crash--which he attributes to ""cheap credit"" and ""cheap money pushing prices up""--the residential market is still working things out.

""Residential securitized credit hasn't really been revived yet. They haven't figured out the regulatory or securities structures to make new residential securitized issuance work,"" Dektar comments. ""That's coming and I think it'll be an important element housing finance in the U.S. as the GSEs, Fannie Mae, Freddie Mac, and Ginnie Mae, shrink in the future. So, overall the market is mostly working right now except for residential.""


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