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."