The Housing Recovery: Will It Last?

By on July 23, 2013

Housing appears to be on the verge of a significant recovery. Home price indicators suggest new potential for impending price appreciation; polls show growing confidence in the housing market; and business prospects for the industry show early signs of strengthening–all suggesting that the long-awaited housing recovery may finally be here.

The housing market looks to be getting stronger, which could be taken as an omen of more generally good economic news to come. After all, home values are an important barometer of consumer wealth. Home construction is a significant fraction of the U.S. economy. Both of those elements had taken significant hits in recent years.

The Rebound in Home Prices
The average home value (as measured by the S&P/Case-Shiller 10-City Composite Home Price Index) shrank 33% from 2006 to 2009.1 But since those difficult days, home prices have begun to recover. As of the latest data (at the end of 2013’s first quarter), the S&P 10-City Composite had gained 5.4% from its recession low, and most of that gain took place during the past year.1

Overall, S&P/Case-Shiller home price indexes cover 20 metropolitan real estate markets around the United States. All 20 of those markets showed solid gains from their year-ago levels in the March 2013 report. Phoenix, which saw some of the steepest price declines of the past decade, led the way with a 23.2% recovery. Of the remaining 19, Detroit was the only city whose rate of growth did not increase.2

Homebuilding Follows Apace
With home prices rising, construction activity should recover as well. Housing starts are now up 23.6%, year over year, supporting a solid growth trajectory in 2013. More importantly, new housing permits, a leading indicator for future construction, have been rebounding even more strongly, to a 925,000-unit pace in January, the highest rate since June 2008.3

Builders are building because demand has picked up, as evidenced by the shrinking inventory of unsold homes. New home sales surged nearly 16% to an annual rate of 437,000 units in January–the strongest gain since July 2008. Existing home sales came in a little weaker, but in both cases, the data have maintained an upward trend since last June, keeping the housing recovery in place.3

Other measures of market strength come from the National Association of Realtors (NAR). As of January, NAR’s measure of buyer traffic is up a whopping 40% from year-earlier levels, but the companion measure of seller traffic has held steady. That’s resulted in a near-record low of inventory for sale–it would take just 4.1 months to eliminate the supply of unsold new homes. The inventory of existing homes, at 4.2 months, is the lowest since April 2005, when the housing boom was near its peak.3

A third measure of market prospects is the monthly expectations survey by the mortgage bank Fannie Mae. They report that nearly half of the people they polled (48%) believe home prices will go up in the next 12 months. The number who fear home prices will decline was just 10%, the lowest level ever recorded in the survey. Similar numbers believe that rental prices will also go up in the year ahead.4

Capitalizing on the Recovery
There are significant implications in this turnaround for investors as well as homeowners.

Certain industries stand to benefit from a housing recovery. Homebuilders themselves are not the only business actors who stand to gain from a turnaround. Home furnishing and consumer electronics retailers tend to benefit from increased real estate activity. Further down the road, so do certain manufacturers.

Courtesy of: Irene F. Stolarz, Family Wealth Director, First Vice President, Financial Advisor
Branch Name: Morgan Stanley, Little Falls, NJ
Phone Number: 973-890-3020
Web Address: www.morganstanleyfa.com/stolarz

Footnotes/Disclaimers
1Source: S&P Dow Jones Indices LLC. The S&P/Case Shiller 10-City Composite Home Price Index is an unmanaged index that is calculated monthly to reflect the average prices recorded for single family home sales in 10 major U.S. cities–Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington, D.C. Data are as of January 2013 and reported on March 26, 2013. The S&P/Case Shiller 10-City Composite Home Price Index has been calculated monthly from then-current market reports since May 2006; index values prior to that date were calculated from historical real estate transaction records using the same methodology. You cannot invest directly in any index. Past performance does not assure future results.
2Source: Home Prices Accelerate in January 2013 According to the S&P/Case-Shiller Home Price Indices, S&P Dow Jones Indices press release, March 26, 2013.
3Source: Trends & Projections, Standard & Poor’s, March 2013.
4Source: Consumers’ Positive Housing Attitudes Withstand Fiscal Concerns, Fannie Mae press release, April 8, 2013.
If you’d like to learn more, please contact Irene F. Stolarz.
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