The U.S. housing market will experience a second recession, forcing banks to post additional loan-loss reserves, said analyst Meredith Whitney, founder of New York-based Meredith Whitney Advisory Group, in an interview on CNBC Squawk Box, where she also talked about deflation in the economy, hinting that the housing crisis is far from over, due to strategic defaults, long term high unemployment, and increasing foreclosures.

“Most investors are not baking in a double-dip in housing,” Ms. Whitney said, “You’re going to see banks post additional reserves associated with this double-dip in housing, and that means weak performance going forward.”

U.S. home prices fell more than 30% from their peak in 2006 through the first quarter of 2009, prompting banks to take writedowns on mortgage loans. Housing starts have increased 24% since the low in April 2009 as mortgage rates remained near record lows and the U.S. government offered tax credits to home buyers.

Ms. Whitney said she didn’t foresee the trend of some homeowners paying off credit cards and other debt instead of making mortgage payments, as they await better terms on mortgage modification programs.

“Banks are actually accelerating their foreclosure programs, accelerating their short-sale programs. People who have been paying their mortgage now have to start paying rent. You’ll see a real leg down in supply displacement when you foreclose and you have to sell.”

Job cuts by state and local governments will also contribute to a “rough second half” for the U.S. economy, she said.

Financial reform will slow the velocity of money and cause “de-banking” as more Americans lose access to some banking services, making it “more expensive to be poor in this country,” Ms. Whitney said.

Meredith Whitney is a frequent contributor to CNBC, Fox Business, and Bloomberg News programs. Her extremely bearish view on banks landed her on the cover of the August 18, 2008 issue of Fortune Magazine. Even before the problems in September that befell Merrill Lynch and Lehman Brothers, she is quoted as saying, “It feels like I’m at the epicenter of the biggest financial crisis in history, however even a broken clock is right twice a day”.

In 2007, Whitney was listed as the second best stock picker in the capital markets industry on Forbes.com’s list of “The Best Analysts: Stock Pickers”, as well as being named “one of NY Post’s 50 Most Powerful Women in NYC.

Whitney, who was ranked as one of Fortune 500’s “50 Most Powerful Women in Business” in 2008, has also won CNBC’s “Power Player of the Year” over Jamie Dimon, Ben Bernanke, and Hank Paulson.

By Benjamin Tal
CIBC WORLD MARKETS

There are already early signs that point to the non-linear nature of the current recovery in both Canada and the US.

• Excluding the one-off impact of census related hiring, overall employment growth in the US during May was very weak.
• Retail sales fell by 1.2% in May. Sales tumbled at building supply stores, reversing more than half the surge of the prior two months. As well, auto sales show a notable softening.
• Overall mortgage application volume, which includes loans for purchases and refinancing, dropped by more than 12% during the week ending June 4, compared with the previous week. Refinance volume tumbled 14.3%. This is the lowest level in more than 13 years—a clear sign that the housing market is struggling without government incentives.

These observations are consistent with our call that overall US growth in the second half of the year and early 2011 will be on the soft side. This suggests that the Fed will not touch rates until probably the second quarter of 2011.

Note that the temporary lift from the government has led to a reversal of the deleveraging process by American households in recent months. For example, the saving rate is now at 3.4%—down from 5.4% in the second quarter of 2009. Even more interesting is the difference in savings among income groups. The savings rate of Americans with income of more than $100,000 fell to the level seen before the recession. At the same time, those who earn less than $100,000 managed to increase their saving to a 20-year high. As well, credit is starting to rise, but even here we have to take a closer look. Total revolving credit (credit cards) was down by $8.5 billion while non-revolving loans (car and mobile homes) were up by $9.5 billion. This suggests that banks are very selective in their lending practices which, in turn, lead to some improvement in the quality of credit.

In Canada there are clear signs that the housing market is softening. Housing starts are slowing, while supply of existing houses is outpacing demand. This raises the issue of the quality of mortgage credit in Canada, and how significant will higher rates will be impacting the market as a whole.

Note that the vast majority of home owners in Canada regardless of their age have not experienced any worsening in affordability despite the rapid increase in prices. The only sub-group of households that have seen some deterioration in their affordability position is older Canadians with average income of less than $50,000. Zooming in on this group we find that on average they spend close to 60% of their gross income on mortgage payments, property taxes and electricity costs. This is three times the average ratio seen among households at the same age groups but with income of over $50,000. Note, however, that as opposed to the situation in the US and to a common misconception, the share of this vulnerable group in total mortgage holders in Canada is on the decline—currently accounting for Just over 13% of all mortgages in Canada, down from 19% five years ago. Also note that the share of the least vulnerable group (older/higher income) is on a clear upward trajectory. The practical implication of this finding is that the composition of the mortgage market in Canada has, in fact, improved over the past few years.

Interestingly, there is no significant difference in affordability between households with fixed rate mortgages and those with variable rate mortgages. While variable mortgage holders enjoy lower interest rates, the average mortgage they carry is 7% larger.

While one cannot ignore the risk of an outright decline in home prices in the coming 12-18 months, nothing in the data supports a market crash. As opposed to the US, the share of mortgage holders in Canada has in fact declined in recent years, while the increase in the average size of mortgage has not coincided with a significant worsening in affordability. While higher interest rates will clearly erode affordability, our detailed look at the distribution of mortgage payments as a share of income does not reveal major pockets of vulnerability. Accordingly, the most likely scenario is that higher interest rates will lead to a modest decline in prices (probably in the magnitude of 5%-10%) in the coming year or two. But given relatively modest rate hikes and the current balanced affordability position, the more significant adjustment will be in housing market fundamentals that are likely to catch up with prices in the coming years—paving the way for a healthier housing market by mid decade.

A new US National Housing Survey that has been conducted in order to take the pulse of the public’s current attitudes toward housing, especially in light of the current housing crisis, has found that two-thirds of Americans still want to own a home.

The research project asked more than 3,000 consumers about their confidence in homeownership as an investment, the current state of their household finances, their views on the U.S. housing finance system and their overall confidence in the economy.

“Despite the recent downturn in the housing sector, Americans continue to value homeownership and think about their homes in ways that go much deeper than the financial investment,” said Mike Williams, President and CEO, Fannie Mae. “The public also strongly believes in the importance of upholding the financial commitment involved in buying and owning a home, even during these challenging times when home values have fallen.”

The survey revealed that homeowners and renters alike are taking a more cautious approach to homeownership. Nearly a quarter of renters polled (23 percent) say they will buy a home later than once planned. In addition, Americans with traditional, fixed-rate mortgages with predictable payments are significantly more satisfied than those with other types of mortgages. Respondents cited non-financial reasons such as safety (43 percent) and quality of local schools (33 percent) as driving factors in wanting to own a home, ahead of financial considerations.

“Consumers are still committed to owning a home, but are showing increased cautiousness, regardless of whether they rent, own their homes outright or have a mortgage,” said Doug Duncan, Vice President and Chief Economist, Fannie Mae. “They are rebalancing their attitudes toward housing and homeownership by adopting a more realistic, long-term approach, and are less willing to take risks. This focus on sustainable housing is better for the economy, better for the housing market and better for America’s families.”

A majority of consumers (60 percent) believe that buying a home today is harder than it was for their parents, and nearly seven in ten (68 percent) think it will be even more difficult for their children. Most respondents (88 percent) also believe that walking away from an underwater mortgage is not acceptable, but those who know someone who has defaulted are more than twice as likely to have seriously considered stopping payments on their mortgage.

Below are some of the key findings from the survey:

• 80% of respondents consider homeownership important for the economy.

• 73% think housing prices will go up or stay the same over the next year, including 37% who think prices will increase and 36% who feel prices will remain about the same.

• 70% believe buying a home continues to be one of the safest investments available. This compares to 74% who think putting money into a bank account (money market or savings account) is safe.  In contrast, only 17% believe buying stocks is a safe investment.

• Americans with 30-year fixed-rate mortgages are significantly more satisfied (93%) than those with other types of mortgages (76% for those with hybrid ARMs and 68% for those with ARMs).

• 88%, including seven in ten who are delinquent on their own mortgages, do not believe it is acceptable for people to stop making payments on an underwater mortgage, while 8% believe it is acceptable.

• However, when asked if financial distress makes stopping payments on an underwater mortgage acceptable, 15% of respondents said yes.

• Both delinquent mortgage borrowers and those current on their mortgage payments are more than twice as likely to have seriously considered stopping their payments if they know someone who has already defaulted.

For more information about the survey, please visit:
http://www.fanniemae.com/about/housing-survey.html