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A 2012 Housing Rebound Can't Even Save Bank of America


So what are the odds of a strong housing rebound in 2012?

Right now, economists think it is pretty remote. Housing prices are, at best, expected to bottom in the second half of 2012, according to consensus estimates. And once it finds bottom, it is expected to languish there for another couple of years as excess supply continues to strangle prices.

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So if you are looking for a "black swan" event with a positive spin for 2012, it does not get better than a robust recovery in housing. It is the stuff you dream of if you have an underwater mortgage- or if you are Bank of America's (BAC) CEO Brian Moynihan.

An improvement in housing will no doubt help the home-building sector and related industries. But it will also be a big catalyst for bank stocks, with the fortunes of the sector deeply tied to the economy and the problems in housing.

"If you see high single-digit or low double-digit growth in housing, that will get people excited about financials, especially bank stocks," according to Frederick Cannon, analyst at KBW.

Cannon expects Wells Fargo (WFC) to be the biggest beneficiary of a turnaround in housing. "Wells has maintained its presence in the mortgage origination market and is poised to grow mortgage origination business if housing recovers," he said.

One might expect the stock of Bank of America, which has been weighed down the most among the large banks by its mortgage woes, to do better if housing recovers. However, Cannon says it would take a lot more for the bank to resolve its problems. "Unless the housing market goes up 30% to 40%, those legacy assets are going to continue to be an issue for a long time."

Bank of America, JPMorgan Chase (JPM) and Wells Fargo are the biggest players in the mortgage origination business. However, Wells derives a bigger chunk of its business from mortgage banking compared to its larger rivals.

While it is hard to imagine the current housing slump suddenly turning around to post double-digit growths, some unforeseen developments could ease the situation in housing, according to analysts.

For instance, if banks succeed in entering a broad mortgage settlement over their allegedly inappropriate foreclosure practices with the attorneys general - including California - that could be a "huge" deal, according to Cannon.

So far, the negotiations have been at an impasse, as banks seek a broad release from further liability to states, while federal and state regulators want to hold banks more accountable for their lending practices during the bubble. Some states have already pulled out of the talks, but perhaps banks might win them over yet.

Even an expensive settlement will be acceptable, according to Cannon, as it will resolve the uncertainty surrounding litigation. "Right now it looks like these issues will last for years."

Sam Khater, senior economist at CoreLogic, which provides financial, property and consumer information and analytics, says much of the problem assailing the housing market is excess supply, with foreclosure inventory being a significant contributor.

Any programs targeted at reducing the foreclosure inventory could also serve as a catalyst for a housing recovery.

One idea that has already been floated to target the excess foreclosure inventory is a plan to convert REOs - in other words, foreclosed property - to rentals.

More than 400 proposals have been already submitted to the Federal Housing Finance Agency, which is seeking to minimize the losses of Fannie Mae and Freddie Mac and stabilize housing values by converting a portion of its foreclosure inventory into rentals, according to a Bloomberg report.

The FHFA has not given a timeline for structuring its program.

Khater expects that such a program could help whittle away excess vacancies. "Once the REOs are removed, home building will pick up and there will be a pick up in sales and home prices," he says.

He expects that the pick up in single family housing could come at the expense of the multi-family segment, which is currently doing relatively better. Still, he believes that a program along those lines would be a step in the right direction.

While these programs might not lead to an immediate spike in home prices, they could improve the expectations of housing prices, which could lead to home purchases. With housing affordability at its best level in decades and rental costs also rising, there are buyers at the sidelines waiting for the economy to improve to step in and buy homes. Something as little as an expectation that inflation could rise further could spur such people to buy homes.

Khater also says the market underestimates the power of demographics. A lot of recent graduates and young workers have delayed buying a home by moving in with their parents or their friends. "Even if they are underemployed they are still saving a lot more than they would have done normally on their own," he says.

The demographic phenomenon might take a longer time to play out, maybe three or four years. But a further improvement in the job market could help nudge these potential homebuyers into action.

We can only hope.

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