NEW YORK (
) -- One development in recent economic data that should be getting more attention from investors is a series of signs that the U.S. housing market may have reached a bottom and is beginning a long-awaited recovery.
It's a story that's easy to overlook, in part because it's hardly spectacular in comparison with Europe's debt crisis, weak employment data and an upcoming U.S. presidential election. The S&P/Case-Shiller 20-city home price index came in essentially flat for March on a seasonally adjusted basis, marking the end of a long string of declines. That came after the National Association of Realtors said last week that sales of previously owned homes increased 3.4% in April from a month earlier.
If the housing market has begun a recovery, today's stock prices are a long-term bargain.
Housing remains deeply depressed, but the data are fueling hope that the current mix of low home prices and record-low mortgage rates is luring buyers for this spring selling season. Housing starts and building permits have shown recent increases, and shares of some homebuilders have bucked the market's sell-off. Shares of
are up more than 10% since the beginning of March, while the
is down by more than 5% over the same period. Shares of
are up 9%; shares of
are up 7%.
"There's a lot of widespread evidence out there that we've reached the floor for the housing market in terms of sales and price," said Paul Ashworth, U.S. economist with Capital Economics, an independent macroeconomic research consultancy.
Residential housing is only about 2% of GDP now, so if Ashworth is correct, that's hardly a reason to think the sector is going to begin generating a substantial boost to national employment figures any time soon. Moreover, housing starts are still running at an annual rate of only 717,000, according to the Commerce Department. That's up 30% from last year but still well below the level we enjoyed at the height of the housing bubble, when annual housing starts numbered over 2 million, and it's also well below the long-term average of 1.5 million new homes per year since 1959.
Still, an eventual return to that average is a good bet, and when we do get there, things are going to look a lot better. The legendary investor Warren Buffett, CEO of
noted in his most recent annual letter that over time, the number of housing units created in the U.S. necessarily matches the number of households formed -- minus a normal level of vacancies. During the boom years before the financial crisis, the U.S. added more housing units than households, creating a large oversupply.
The painful correction that ensued reversed the trend dramatically, leading to a situation in which more households are being formed than there are houses being built. Buffett was too early in predicting the eventual recovery in housing construction, and we may still have a ways to go, but he maintained in his letter that investors can be sure that it will happen.
"This hugely important sector of the economy, which includes not only construction but everything that feeds off of it, remains in a depression of its own," Buffett said. "I believe this is the major reason a recovery in employment has so severely lagged the steady and substantial comeback we have seen in almost all other sectors of our economy."
If Buffett is correct, and the housing market really has begun a recovery at a time investors are fleeing the stock market amid predictions of another recession, today's stock prices would represent an excellent bargain for the long-term investor looking to allocate fresh capital. Berkshire's portfolio of businesses does give Buffett an elevated view of the housing market -- and say what you want about his politics, the man has been through a few market cycles and apparently has created some value along the way.
I think he's right about the importance of housing to the overall economy. Home values have a profound effect on consumer psychology and home purchases spur all kinds of demand for goods and services, including cable and telecommunications, durable goods and technology (and the list goes on). And there's no denying that the lingering downtrend in the housing market has mirrored the lingering anxiety felt in the broader economy and the job market, even as other signs of economic recovery have emerged.
"Fortunately, demographics and our market system will restore the needed balance -- probably before long," Buffett said. "When that day comes, we will again build 1 million or more residential units annually. I believe pundits will be surprised at how far unemployment drops once that happens."
Follow me on Twitter @NatWorden.
Disclosure: Worden and/or his firm hold positions in BRK-B, but not in any of the other stocks mentioned in this article
This contributor reads:
On Twitter, this contributor follows: