Housing Comeback in 2013?

RELATED QUOTES

SymbolPriceChange
PCL42.63+1.03
UTX118.57+0.50
LEN38.22-0.55
DHI21.50-0.36

Recent data relating to new home sales, housing permits, declining inventory levels, and rising housing prices are sufficient indicators of an improving U.S. housing market.

Housing Collapse

The sector suffered since 2006 when house prices had fallen by more than 30% across the nation. The decline had been twice as much in some of the metros. Declining house property ate away home equity, wiping out trillions of dollars held by individual households.

Delinquency and foreclosure rates on home mortgages were at an all time high, at levels unseen since the Great Depression. Recessionary conditions along with rising foreclosures in recent years caused the national homeownership rate to decline from its 2004 peak of 69% to under 66% in 2011.

Recent Trends

Fast forward to 2012 and conditions have improved remarkably. To get more specific, data released jointly by the U.S. Census Bureau and the Department of Housing and Urban Development relating to sales of new single-family houses in October 2012 was at a seasonally adjusted annual rate of 368,000, up 17.2% from the October 2011 estimate of 314,000.

Moreover, the median sales price of new houses sold in October 2012 was $237,700; the average sales price was $278,900 up 8.0% year over year.

The data also shows that there are currently 4.8 months of supply of new houses (thanks to strong sales) on the market at the current sales rate and 5.4 months of supply of existing homes. For reference, a healthy market would be between 5 and 6 months of supply.

Meanwhile housing permits, which are the best short-term indicator of future housing starts, also show a strong run up. As of October 2012, housing permits, at 679,900, posted an increase of 33% year over year.

Inventory levels for October 2012 were also low. Five-year data also suggests that inventory for new homes as well as existing homes has been declining.

Moreover, housing prices have been on an upward trend. S&P/Case-Shiller Home Price Index – the gold standard for housing price index – demonstrated a rise in home prices in the third quarter of 2012. The index was up 3.6% year over year and 2.2% sequentially. A consistent rise in home prices for six months through September 2012 is a sufficient pointer that the housing market recovery is in positive territory.

Further, the National Association of Home Builders/Wells Fargo Housing Market Index (:HMI), which shows builder confidence in the market for newly built, single-family homes, posted a solid, 5-point gain to 46 for November. This marks the seventh consecutive monthly gain in the confidence gauge and brings it to its highest point since May 2006. Though any reading under 50 still indicates that the builders see conditions as poor, a substantial progress can be witnessed since this time last year, when the HMI stood at a paltry 19.

Tailwinds

Other tailwinds driving the sector are low long-term mortgage interest rates which translate into higher affordability and a recovery in the unemployment rate which narrowed down to 7.7% in November 2012 from the highs of 10.0% in the recent past. These factors are now expected to trigger a renewed demand for houses.

Aiding Economy

Historically, residential investment, of which new home construction is the most important part, has been the catalyst that has pulled the economy out of the woods.  The building of every new single-family home creates roughly three new jobs. 

A recovery in housing will not only benefit homebuilders like Lennar Corporation (LEN) or D.R. Horton Inc. (DHI), but all other businesses that go into producing a home. These include lumber, produced by companies like Plum Creek Timber Co. Ltd. (PCL), concrete, lighting fixtures, heating, and cooling equipment providers like United Technologies Corp.  (UTX) and the like. Jobs are also created for service providers such as real estate agents, lawyers, and brokers.  

In addition to generating employment, housing generates revenue for the government by way of property tax, which helps in the funding and flourishing of local schools and communities.

Residential investment in the Gross Domestic Output which has averaged at 2.7% year to date is expected to increase to more normal levels of 4.5% to 5% of GDP over the next couple of years, if the current recovery gathers momentum.

Putting It Together....

The recent trends backed by adequate data reinforce our view that the housing market is on its way to recovery. However, a big if remains in place in case the U.S. fails to address the Fiscal Cliff or suffers from a slowing global economy in the wake of the European debt crisis.

Key data relating to homebuilder sentiment index, November Housing Starts numbers and Existing Home sales data, due this week will provide further clarity to the housing market movement.

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