Constructive on U.S. Housing
This column originally appeared on Real Money Pro at 7:58 a.m. EDT on April 27.
NEW YORK (Real Money) --
A new development is catching home buyers off guard as the spring sales season gets under way: Bidding wars are back.I continue to hold to the variant view that the emerging and durable recovery in the U.S. housing market will be one of the biggest economic stories in the next 12 months (and beyond). Too many are reacting to the bad, backward-looking Case-Shiller data. (The index has a two- to three-month lag and 30% of its transactions are distressed, so it will be under pressure for now.) Driving your car while looking in the rearview mirror is fine if the road is straight and clear, but it's not such a good idea when the road is curved and rife with obstacles. And the U.S. housing market is nothing if not a long, winding and bumpy road. The real story is that the U.S. home market is now bifurcated (historically, a signal of a nascent recovery), stress pricing has stabilized, new-home prices are going up and so are existing-home prices (none distressed). As The Wall Street Journal article above indicates, inventory is being cleared. Industry data support the notion that housing demand is now in an uptrend. One company after another is reporting improving weekly metrics -- surveys, traffic, shipments and orders. My analysis suggests that housing demand and home prices will steadily improve in the years ahead based on the underpinnings of record home affordability, low home prices relative to rental prices, underproduction of new homes, continued household formation growth, steady growth in the jobs market, an easing up in mortgage lending, and low (by historic standards) mortgage rates -- all of which will conspire to unleash pent-up demand. From my perch, housing is embarking on a durable multiyear recovery that could extend throughout this decade, and residential real estate's broad multiplier effect will likely cushion the U.S. economy from the monetary and fiscal cliffs and some of the plentiful structural headwinds that have served as a governor to expansion. The economic consequence to the rebound in housing could be profound, providing construction jobs and lifting consumer confidence and spending. This constructive housing view is central to my thesis that the domestic economy's growth will be self-sustaining and supportive of reasonably healthy corporate profits. It is also central to my short bond analysis and view.
From California to Florida, many buyers are increasingly competing for the same house. Unlike the bidding wars that typified the go-go years and largely reflected surging sales, today's are a result of supply shortages....Competitive bidding in the current environment isn't producing huge price increases or leaving sellers with hefty profits, as occurred during the housing boom. Still, the bidding wars caused by tight inventory provide the latest evidence that housing demand is starting to pick up after a six-year-long slump. An index that measures the number of contracts signed to purchase previously owned homes rose in March to its highest level in nearly two years, up 12.8% from a year ago and 4.1% from February, the National Association of Realtors reported on Thursday. "We very much believe we've hit bottom," said Ivy Zelman, chief executive of a research firm, who was among the first to warn of a downturn seven years ago. Earlier this week, she raised her home-price forecast for the year, calling for a 1% annual gain, up from a 1% decline.... Inventory levels in many markets were at the lowest level in years. At the current pace of sales, it would take just 1.5 months to sell all the homes listed in Sacramento, Calif., and 2.4 months to sell all the homes listed in Phoenix. San Francisco and Washington, D.C., each have 3.4 months of supply, while Miami has 4.1 months of supply. -- Nick Timiraos, "Stunned Home Buyers Find the Bidding Wars Are Back," The Wall Street Journal (April 27, 2012)
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