U.S. Housing Market: Anatomy of a Recovery

Housing MarketGet ready; the housing market may be primed for an upward move. At least I’m hoping it is.

The housing market may be on its way up, but prices also need to follow home sales higher. The problem has been the massive inventory of home foreclosures selling at dirt-cheap prices across the nation, especially in the rust belt states and areas such as Nevada, Florida and Arizona that witnessed pricing booms years back and are now struggling to hold on. A quick look at homes in Arizona and Florida shows how far prices have come down.

We are seeing some heavy buying action in the foreclosure housing market that may drive prices higher. There is currently a strategy from investors and institutions who are buying foreclosed homes in order to rent them out in what is a growing rental market.

The U.S. government is looking at a trial project that would see Fannie Mae sell large pools of single-family homes in the distressed housing markets to investors. Fannie and Freddie Mac combined own around 200,000 foreclosed homes and, according to RealtyTrac, about 600,000 foreclosed single-family homes are held by the banks, so there’s quite a lot of inventory to get through. However, once the levels fall, we could see an upward move in prices.

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The buying of foreclosed homes will eliminate some of the inventory build-up of the cheap homes and inevitably allow prices to move higher. At least that’s what I hope will happen.

The reality is that the activity in the housing market continues to show improvements, despite ongoing pressures with home prices. The ongoing strength with jobs growth and a downward moving unemployment rate is helping to attract more buyers to the housing market and the hope is that prices will advance higher. For now, home prices continue to struggle and this means reduced wealth for consumers to spend on non-essential goods and services. The Case-Shiller 20-city Index showed an average 4.0% price decline across the top 20 U.S. cities in December after a 3.8% decline in November. The problem has been the high foreclosures and short sales driving sales and placing a downward pressure on home prices, but, perhaps with the inventory declining, prices will stabilize.

Housing starts came in at 698,000 in February, just below the estimate of 705,000 and the revised 706,000 in January. This reading means that builders are seeing higher demand down the road in the housing market and this is positive. Moreover, the key Building Permits reading, which shows how well the building pipeline is doing, is also improving, with 717,000 permits in February, above the 695,000 estimate and the revised 682,000 in January.

The NAHB/Wells Fargo Housing Market index, an indication of homebuilder sentiment, is at its highest level since May 2010, coming in at 28 in March, but still well below 50. This means there are more builders that see the housing market as poor than as positive. The last time the index was above 50 was way back in April 2006 before the subprime fiasco.

The evidence is that the housing market has bottomed out. We are seeing an influx of foreign buyers from Brazil and Canada buying real estate in Florida and other depressed regions. So, while home prices continue to languish, we are seeing a pickup in activity that will inevitably drive up home prices sometime in the future, but this may not be until 2013.

As I said, a strengthening jobs market will help the housing market. I feel the jobs area is improving, which I discussed in Jobs: Are They Headed Down the Right Path?