JPMorgan: Annual homes sales must average 5.5 million to absorb liquidations

JPMorgan Securities said existing home sales need to average about 5.5 million units a year to absorb a projected 2.25 million to 2.5 million in liquidations. While analysts said the “recent run up in prices may mean we tread water here for a bit,” and they await data on how the pace of liquidations relative to existing homes sales impacts home prices and severities, their target for private-label residential mortgage-backed securities remains. “We think that our view from our 2011 outlook is still reasonable,” analysts said. “Severities will ramp 5 to 10 points higher, and home prices still have another 4% to 6% decline to go.” The analysts provide a Securitized Products Weekly newsletter for clients of the investment bank. The researchers constantly update mortgage-collateral performance and movement in order to make secondary market-side predictions. JPMorgan said on the back of its latest results, that there is room for gradual spread tightening of another 50 to 100 basis points in nonagency RMBS, despite heavy secondary supply. As for mortgage-backed securities overall, JPMorgan Securities recommends remaining neutral due to a recent investor survey that shows overweights are now 51% of the market, the highest level since July 2009. “We still have a basis toward Alt-A fixed-rate current loss takers where spreads are roughly 400bp over swaps,” JPMorgan Securities said. “Senior option ARMs are 400-500bp over swaps and can still present select opportunity, but we think that spreads may have compressed in too close with Alt-A fixed-rate paper in the near-term.” Write to Jason Philyaw.