As Housing Sector Recovers, Signs of Sustainability Emerge

By

Published May 10, 2012

| FOXBusiness

So long as the eurozone debt saga doesn't spiral out of control, some housing-market observers are growing increasingly confident the tepid rebound the industry is now experiencing is legit. 

In fact, there now stands a reasonable chance the sector of the economy where this entire global mess began will actually add to U.S. gross domestic product this year for the first time in six. 

“We’re in the seventh year for corrections for housing and corrections don’t last forever," said Russell Price, senior economist at Ameriprise Financial (AMP). “I think we’re really coming to a floor for the housing market.”

The stronger-than-expected yet choppy improvements in the U.S. economy in recent quarters may have finally planted the seeds for enough positive momentum in the housing market.

While they are far from healthy and subject to frequent revisions, government labor indicators suggest the jobs market has improved, potentially giving consumers the courage to purchase a home. These upbeat developments should trickle down to the home-building sector as well.

“Based on recent macroeconomic data, paired with the latest round of home builder results, we are more bullish on housing and the fundamentals of the home builders,” analysts at Barclays (BCS) wrote in an optimistic research note released last week.

Shrinking Inventories

Proponents of this rosier forecast point to a slew of housing-related indicators that have begun to gradually improve.

According to Barclays, the rate of existing home sales have averaged 4.2 to 4.4 million units over the past year, which was strong enough to drive existing home inventories 22% lower over that span to 2.37 million. Those inventory levels translate to 6.3 months of sales, compared with 10 or more in late 2010.

The numbers are even more promising on the new home side, where Barclays said inventories have tumbled to an all-time low of 144,000 units, or 5.3 months of sales, compared with 4.5 months before the downturn.

Inventories continue to slip despite the fact that building activity has begun to show signs of life.

“Single-family starts, which have remained moribund for more than three years, are nearing the point at which they will have to rise just to keep new home inventories steady at historical low,” Barclays said.

For a rapid-fire view of conditions on the ground in the housing market, Price pointed to the Mortgage Bankers Association’s survey on applications for purchase mortgages. After jumping 10% in March and 0.5% in April, they rose 3.4% week-over-week in the first week of May on a seasonally-adjusted basis.

“The average person is starting to see more stability in the [housing] market,” said Price. “If     they’ve been on the fence up until now and they’re seeing improvements in the job market …now is the time for them to move. Certainly it’s spurring investors.”

Next Stage?

Barclays said two things need to happen for housing to kick into the next gear: the recovery in the U.S. “has to translate into firmer housing demand” and new home inventory levels need to get “even leaner.”

Price believes the next stage will feature an uptick in short sales, which are an alternative to foreclosure that often allow for underwater homeowners to escape their mortgages.

This will be far easier thanks to the $25 billion pact signed earlier this year between banks like Bank of America (BAC) and the government that laid the groundwork for a faster approval process for these distressed sales.

A rise in short sales would further help clear out the inventory of distressed homes that is weighing on national home prices.

Even some measures of home prices have offered signs of hope to homeowners.

The Federal Housing Finance Agency’s house price index, which measures purchase prices of homes backed by mortgages sold or guaranteed by Fannie Mae or Freddie Mac, went into the green on a year-over-year basis in March -- the first price increase since July 2007, Barclays said.

For Home Builders, a Return to the Black?

If these positive signs in the housing market continue to build momentum, it will give further support to publicly-traded home builders like Lennar (LEN).

Barclays is now predicting the housing industry will experience its first “successful” selling season absent the aid of stimulus since 2005.

But the improvements aren’t being enjoyed evenly as large public home builders have picked up market share thanks in part to their smaller, regional peers’ more limited access to capital, Barclays said.

A number of public home builders are expecting to turn a profit for the first time since 2006, including D.R. Horton (DHI), Toll Brothers and Lennar, which reported a 25% leap in new orders last quarter.

“Builders are just trying to catch up to current demand,” said Price.

Last week Barclays upgraded a trio of home builders: Lennar, Ryland Group (RYL), Hovnanian (HOV).

“This is a positive dynamic for an industry that has had a dearth of favorable headlines the past several years,” the analysts wrote.

Risks Loom

Of course, not everyone is sold on the housing-market recovery, especially as economic concerns have cropped up once again in recent weeks.

Economists were struck by disappointing government jobs reports on March and April that weighed on Wall Street. This week jitters about Europe’s never-ending debt mess also reemerged, sending the Dow Jones Industrial Average tumbling nearly 200 points on an intraday basis in back-to-back sessions before recovering.

Barclays says its bullish forecast is predicated on a number of factors, including “turmoil” in Europe not sparking a “full-blown financial crisis” ala 2008, China’s economy enjoying a soft landing and U.S. policymakers not imposing “excessive fiscal tightening” in 2013.

“If any of these risks materialize, then the potential for another recession in the U.S. will increase,” Barclays warns, saying this would certainly hurt the housing market.

URL

http://www.foxbusiness.com/economy/2012/05/09/as-housing-sector-recovers-signs-sustainability-emerge/