Tuesday, May 15, 2012

The Housing Market Recovery Has Officially Begun

That's how Time Magazine is describing the conclusions from a new report issued today by the Conference Board and Nielsen through their jointly-owned Demand Institute. Here are some excerpts form the report titled "The Shifting Nature of U.S. Housing Demand":

"The worst is over for the U.S. housing market. After six years of declining sales and falling prices that wiped $7 trillion from the value of housing assets, a turning point has been reached. The Demand Institute sees average prices rising by up to 1 percent in the second half of 2012 (in seasonally adjusted terms), marking the start of a housing recovery.

As the market revives, so will consumer spending: the business of building, buying, and selling homes generates enormous expenditure in a wide range of industries, including those associated with the transaction, those that produce goods and services for the home itself, and those that provide goods and services in the neighborhood around the home.


This housing recovery will be different in nature from previous recoveriesbecause it will be shaped by new market conditions and expectations. This report explains those differences and the various ways in which they impact consumer demand."


From the Time Magazine article:

"The report argues that the recovery will come in two stages. The first will be driven by rental demand. Over the past several years plummeting home prices have been coupled with rising rents, and this dynamic has made landlording very profitable. This is evidenced by the recent rebound of the apartment-building business. According to the report, “The only segment of the home building sector now showing clear signs of recovery is multifamily housing,” noting that housing starts for multi-family units have increased 54 percent in 2011 over the previous year.

The Demand Institute also believes the dynamics buoying the multifamily market — rising rents, low interest rates, and cheap real estate — are starting to boost the single-family housing sector as well: “Investors attracted by high yields are buying up single-family properties that can generate rental income.”

The second stage of the recovery will occur after this investor intervention causes prices to stabilize. Price stabilization is crucial for banks to loosen their stingy lending standards. When home prices are falling, it’s bad business to issue mortgages to all but the most credit-worthy borrowers. But in an environment of even slowly appreciating real estate, banks can afford to offer more generous terms."

Here are the report's predictions for home values:

Phase 1: We predict that seasonally adjusted average house prices will grow by just under 1% in the second half of 2012. In 2013, growth will increase to about 1.5% over the year, rising to 2.5% a year in 2014.

Phase 2: We expect house prices to increase by an annual 3% to 3.5% between 2015 and 2017. Improved economic conditions, and in particular lower unemployment, will encourage more people to buy again. So will historically low home-ownership costs, even though house prices and interest rates are likely to rise during the period. Importantly, by the start of 2015, there will no longer be an oversupply of existing properties.

From the report's conclusion:

"The double-digit increases in U.S. housing prices over the first half of the past decade proved unsustainable. But the freefall is over. The point has been reached where housing prices will start to climb, albeit at single-digit rates in most markets over the next five years.

That is good news for Americans who want to invest in building a home for themselves and their families. While short-term profits will be rare, the evidence suggests that housing remains a sound long–term investment. 

Nevertheless, consumers are adapting to new economic circumstances that will change how and where they choose to live. And where there is shifting demand, there are opportunities for new business. It is a shift with which consumer-facing companies should familiarize themselves."

8 Comments:

At 5/15/2012 3:12 PM, Blogger morganovich said...

this seems like a balanced and plausible scenario. (more so than notions of double digit price increases)

housing will still have some headwinds, but it may be able to start looking more constructive. (sorry jon, could not resist)

the one tricky bit to track is homebuilding. that's a bit of a tipping point issue. right now, the buy vs build price heavily favors buying an existing home. until the gap narrows somewhat, new construction will remain at depressed levels. however, once that gap is closed, new construction tends to really take off.

i also wonder how many homes have flat out been lost in this downturn. anecdotally, my parents were looking at a house in florida. they tried for a year to buy it but it was a foreclosure and they could never get anything sensible out of wells fargo who just delayed, equivocated, and would not even really come to the table, much less name a price.

after a year of being vacant, the mildew and water damage has left it uninhabitable. it's a down to the studs renno at best and quite possibly a tear down.

i have heard stories like this from many folks. houses simply do not do well if you leave them alone for a year or 2.

 
At 5/15/2012 5:05 PM, OpenID moneyjihad said...

Since when did demand for rental units in apartment complexes begin counting as a "housing market recovery"? Seems misleading to me.

 
At 5/15/2012 5:44 PM, Blogger Larry G said...

looks like we still count on housing to for the economic backbone of the economy.

that's problematical given the hangover we are still trying to get over.

I hope Americans themselves start to realize what a mistake it is to make the house the center of their financial planning...

we need to change our thinking to be more like other countries.

Construction (all kinds including infrastructure) is an important contributor to the economy but the way we were doing it with residential housing was doomed and I hope we're not headed back to the same practices.

 
At 5/15/2012 5:49 PM, Blogger morganovich said...

money j-

i think the argument they are making is that higher rents make purchase relatively more attractive.

rent to purchase price or mortgage ratios are often used to gauge how the housing market sits. they were WAY out of wack in 2006-7 with the cost to buy far exceeding the cost to rent.

that ratio seems to have mean reversion tendencies.

in general, the rule of thumb seems to be that if the price of a home is less that 15X annual rent it's cheaper to buy if you plan to live there for more than 5 years.

 
At 5/15/2012 6:40 PM, Blogger Craig Howard said...

As the market revives, so will consumer spending: the business of building, buying, and selling homes generates enormous expenditure in a wide range of industries, including those associated with the transaction, those that produce goods and services for the home itself, and those that provide goods and services in the neighborhood around the home.

A booming housing industry is the result of a prosperous economy -- not a cause. Houses are a consumer good. People buy them when they are gainfully employed and confident of the future. I'm sick and tired of all the blather about housing's importance to economic growth.

 
At 5/15/2012 7:01 PM, Blogger Pulverized Concepts said...

Hard to believe that any of the multitude that went into foreclosure are now part of the cohort that's buying. So who are they?

 
At 5/16/2012 12:24 AM, Blogger Mkelley said...

Time Magazine is a lousy source for information any time, but right now they are pulling out all the stops to get their hero Obama re-elected. I bet some of this is just spin.

 
At 5/16/2012 12:25 AM, Blogger Mkelley said...

Time Magazine is a lousy source for information any time, but right now they are pulling out all the stops to get their hero Obama re-elected. I bet some of this is just spin.

 

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