Housing Market a Reason for Optimism

Magnotta@AmyMagnotta, CFA, Brinker Capital

After detracting from economic growth for a number of years, the U.S. housing market is in a position to be a positive contributor to growth.  The supply and demand dynamics in the housing market are attractive.

Supply is at low levels.  According to the National Association of Realtors, the supply of available homes is currently 4.2 months, down from over 12 months at the worst of the market.  New housing starts have improved, but are still at levels last seen in the early 1990s.  There are also fewer foreclosed properties on the market. CoreLogic reported that 1.2 million properties were in some stage of foreclosure in January, a 21% year-over-year decrease.  Finally, investors (both individual and institutional) have been snapping up properties in previously distressed markets.

Source: FactSet, National Association of Realtors

Source: FactSet, National Association of Realtors

Some owners are waiting for higher prices to put their homes on the market.  However, prices are firming by a number of measures.  The S&P/Case-Shiller National Home Price Index gained +7.3% in 2012.  CoreLogic’s Home Price Index gained +9.7% year over year in January, the eleventh consecutive monthly increase.
Tighter levels of inventory have likely led to higher prices in recent months.  However, rising prices will eventually encourage homeowners to sell and builders to build, adding to inventory and thereby slowing the rise in prices.

Source: FactSet, U.S. Census Bureau

Source: FactSet, U.S. Census Bureau

The demand side of the equation is also positive.  There is pent-up demand for new housing that has built up over the last few years as households have been formed.  Additional job growth will create more demand.  Affordability is still at very high levels with interest rates at record low levels.  If interest rates start to move higher, it could be a trigger for fence sitters to move. Guidelines are strict for obtaining a loan (I can attest to this with my personal experience over the last month), but credit is being extended.

The constructive dynamics in the housing market should be a positive for the economy over the intermediate term.  There are additional benefits to the economy that stem from an improvement in housing – consumers spend on appliances, home improvement (I’ve visited Home Depot or Lowes every other day in the last few weeks), contractors, architects, etc.  In addition, stable and rising home prices will also serve as a boost to consumer net worth and confidence.

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