What’s Really Driving the Housing Market

There are two key variables that continue to hamper the country’s economic renewal—the housing market and jobs growth. Unfortunately, while both are showing some encouraging signs, I feel it will still be several years before we see sustained strength in both. Without jobs or the confidence of getting a job, you cannot expect people to buy houses.

The housing market is clearly better than it was when the subprime mortgage fiasco led to a downfall in theU.S.economy and sent the unemployment rate spiraling higher. Yet we continue to see home prices decline across the top 20 metropolitan cities in America.

In November, housing starts came in at seasonally adjusted annual rate of 685,000 units, according to the Commerce Department. The reading was the highest since April 2010, but still well below the monthly one million plus housing starts that make up what is considered a healthy housing market.

Building permits of 681,000 in November were also ahead of estimates; but again the number is far below what is widely deemed to be a healthy housing market.

What the readings offer is some hope of better readings to come, albeit as I said, we also need to see a concurrent strengthening in job creation to drive a strong housing market. With strong jobs growth, consumers become more confident in buying homes and big-ticket items. Unfortunately, this has yet to happen and I feel it will not be until at least 2012 and 2013 before the situation in the housing market improves.

A strong housing market is critical for the retail sector as homeowners will tend to buy new furnishings, including many big-ticket items. This is not happening, as home prices continue to decline, dragged down by continued high foreclosures and short sales—a situation in which homes are sold below mortgage value. An S&P report showed that homes sold under these distressed circumstances are going for 20% below the actual value of the mortgage. Great, if you are buying; not so great if you are selling.

The reality is that foreclosures are driving the buying in the housing market and this does not bode well for housing price appreciation. It may not be until 2013 until we see prices steadily rise.

Jobs, confidence, and higher home prices are needed to drive spending in the retail sector. Only under this scenario will there be sustained spending and economic growth.

The unemployment rate fell to 8.6% in November, but there are still close to 15 million Americans officially still looking for work. I think the number of jobless people is higher.

If I were a homebuyer, I would likely be shopping given the massive inventory of homes for sale at prices well south of a few years ago. There is value in many regions whether as a primary or secondary investment property. For instance…looking for a retirement property? There are thousands of cheap condos available for sale in Florida and Arizona.

The current market risk is high and I continue to question the sustainability of upward moves in stocks. As such, you may want to make sure your risk management is in place, which I discussed in You Profited Big on the Stock Market Rally…Now What?