As of November 2012, the housing market showed clear signs of recovery, with inventory levels falling and house prices accelerating. As the rebound evolves and gathers pace, we expect a number of distinct opportunities for investors to emerge.

The recovery is likely to unfold over a number of years, given the low base from which we are starting.Historically, we’ve seen housing activity peak at around 6% of GDP, but we’re currently at post–World War II lows, making a climb to prior lows of 3.5% to 4.5% seem reasonable.¹

This argument is strengthened when you consider the $6 to $7 trillion of housing value that has been wiped out over the last few years. In the first half of 2012, about $750 billion of that was recovered, but we still have a long way to go to return to anything like normality.²

A recovery driven by renewed confidence and pent-up demand

There have been several streams of positive news:

• Inventory levels fell in 2012, with the number of vacant homes for sale dropping sharply, while a tightening supply of homes is pushing up prices
• As homeowners begin to feel that value is returning to their properties, we’ve seen them undertake projects they had maybe postponed, such as painting a room, buying a new carpet, or even replacing a kitchen
• Investors are showing increasing interest in buying groups of foreclosed homes, rehabilitating them and turning them into rentals; this is creating something of a “single family rental asset class,” and further reducing housing inventory³

• As employment conditions gradually improve, we believe some of these tenants will want to buy their own homes, further buoying housing demand

• People who have until now been shut out of the market, because they were forced into foreclosure or a short sale, are becoming eligible to buy a property once more

Where we are in the cycle defines the opportunities

All the factors we’ve just described create investment opportunities. We’ve found that each housing recovery goes through three separate stages, which play out over a number of years:

• Rehab
• Build
• Boom

Identifying which stage we are in at any given time is an important step toward determining which sectors or individual stocks may benefit from a housing rebound.

Presently, we believe we’re transitioning from an early rehab stage, where people look to improve their properties rather than move to new homes, to more of a build stage, where we’re seeing a pickup in areas such as new construction. In our view, a whole range of sectors related to housing—such as home builders, home improvement retailers or regional banks—will benefit as the recovery accelerates.

We invite you to contact us to learn more and a J.P. Morgan representative will be in touch with you.