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Kass: Housing Faces a Credit Event

It is important to recognize that only a handful of inflated sales prices can buoy a community of homes. We can already see the pressure in a marked reduction in the participation in first-time buyers (to under 30% of national sales from 40% a year ago). Real estate maven Mark Hanson has estimated that first-time buyers' volume is down 60% to 70% in the last two and a half years.

Almost as significant as higher home prices is the accelerated rise in conventional mortgage rates -- almost unprecedented in terms of percentage off the lows but still low by historical standards.

But it is important to recognize that the absence of exotic loans available in this cycle compared to the previous cycle means that purchasing power has been markedly lowered. (The traditional housing affordability indices don't properly take this into account.)

As demonstrated in the chart below, it takes nearly $100,000 of income in 2013 to purchase a $523,000 home compared to only $66,000 needed in the 2000s.

Year-to-date, these two factors have reduced the purchasing power (and affordability) of buyers by more than 20%. Organic buyers' ability to move up has also been diminished, as it will grow more difficult to sell the first house and/or buy the new home.

2. New-home sales will falter, putting pressure on home builder profits. Some portion of the previously contracted homes that have failed to lock in a mortgage rate at the time of sale will be canceled. And, given the changing complexion of the mortgage market, it will be difficult for builders to make up the lost sales in the second half of 2013. The market has already looked through better-than-expected homebuilding earnings and pummeled merchant builder shares. More weakness may lie ahead.

3. The rate of appreciation in home prices will be down-trending by year-end 2013. It is important to remember that Case-Shiller's pricing index lags real prices by at least four months. It is my view that all other measurements of prices will indicate weakness/deceleration in the rate of growth in home price appreciation by the end of the year -- maybe sooner.

4. The home improvement market will be weakened over the balance of 2013. Shares in the well-regarded remodeling sector -- including Home Depot (HD), Lowe's (LOW) and the like -- remain particularly vulnerable. Refinancings have historically been an important increment to household cash flows and, in turn, remodeling activity. Refinancings have collapsed, and, as a result, the outlook for durable spending is diminishing. With wage growth still moribund and the savings rate at a five- to six-year low, forward-looking personal consumption expenditure growth will likely be lethargic.

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