A Glimmer Of Hope For The Housing Market
Wednesday, April 1, 2009
by Martin Denholm, Managing Editor, Smart Profits Report
“The trend is your friend.”
This old stock market adage holds true (most of the time) when picking stocks. And it’s just as true if you’re currently looking to buy a home in America.
With the U.S. housing market trend heading due south, the National Association of Realtors reports that the median price of a home was $200,900 in February - an 18% slump from February 2008. That’s the lowest average price since late 2003.
In fact, according to the Housing Affordability Index - which measures median home prices and mortgage rates against the median household income - U.S. home prices are now at their most affordable level since the early 1970s.
Hardly surprising, given record low mortgage and foreclosure rates, a huge blob of unsold homes (it would take 12.2 months to clear the backlog), and collapsing house prices that have seen $50,000 shaved off the average value of a home.
And the latest figures showed the housing market still heading firmly downward…
A Bleak January For The U.S. Housing Market
In my last housing market column five weeks ago, I noted the results from the S&P/Case-Shiller home price index for December. Results that showed a gravity-defying plunge of 18.5% for the index of 20 metropolitan cities.
It was the steepest drop on record, coming hot on the heels of an 18.2% fall in November.
Scratch that. January just etched a new dubious record into the history books, with the 20-city index sinking 19% from January 2008 and 2.8% lower than December’s numbers. Of those 20 cities, 9 of them reported a drop of more than 20%.
And just like in December, the 10-city reading fared even worse, collapsing by 19.4% from a year earlier and down 2.5% from December.
From the market’s peak in the second quarter of 2006, home prices have dived by 30%, and the Case-Shiller index has fallen every single month for the past two years.
David Blitzer, chairman of the S&P index committee, notes gloomily that, “There are very few bright spots that one can see in the data. Most of the nation appears to remain on a downward path.”
Most… but not all. Let’s brighten the guy’s day…
The Real Estate Market - Not Just About Housing…
The real estate market isn’t just about housing.
The reason why it’s so critical to the nation’s economic health - and why it’s a key barometer of how soon and how successfully the economy will begin to recover - is because it spills over into other sectors.
Aside from the initial construction of the home itself (which contributes to several industries at once), new homeowners often immediately set about renovating, repairing, and upgrading their house once they move in.
From paint, to furniture, to household appliances and everyday products, to garden equipment, the retail sector is a major beneficiary of a solid real estate market. Remember, consumer spending accounts for about two-thirds of economic activity - and big-ticket home items can inject a substantial amount of cash into the economy.
That’s why it’s encouraging to see home sales pick up recently…
The Housing Market Receives An Upside Sales Surprise
Amid the gloom of the January price plunge, the National Association of Realtors sprung a surprise by saying that new U.S. home sales climbed by 4.7% in February. Existing home sales also popped 5.1% higher, compared with January.
Okay, I know those gains came after steep downward moves, so a rebound wasn’t entirely unexpected. And with supply still far outweighing demand, year-over-year overall home sales were down 4.6% nationwide in February. But you gotta start somewhere - and given that February is one of the coldest months of the year across many parts of America, those figures are pretty good.
And tellingly, one of the most distressed regions - the West - posted a highly impressive 30.4% jump in February sales, compared with February 2008. It wasn’t a fluke either - it was the eighth consecutive month of year-over-year gains for a region that includes California and Nevada.
While the West region - and the nation overall - is far from out of the woods yet, it’s certainly encouraging to see some home sales rising as prices decline and housing becomes more affordable. And particularly given that the West accounts for more than one million units in annual home sales.
More Sales + Higher Prices = Housing Recovery
At some point, home prices will need to rise in tandem with sales in order to boost real estate confidence and lending, which should then kickstart a recovery for the broader economy. But that’s not likely to happen until the supply-demand equation balances out and some of the huge over-supply of homes is taken off the market. Lower prices and increased home affordability could well aid that process.
As we’ve said many times here, one of the best times to buy into a sector, industry, or stock is when investor sentiment is negative. And right now, the market hates real estate.
However, what helped get us into the current mess - the housing market - is also what’s going to help drag us out of it because it’s so crucial to U.S. economic growth.
I’ll continue to monitor real estate trends and keep you posted on any potential investments.
Martin Denholm
Related Articles:
How To Send Your Profits Up As America’s Homebuilders Go Down
$75 Billion To Help Fix The U.S. Housing Crisis
Fixing Today’s Crisis With Mass Economic Stimulus… But Will Asset Values Ever Recover?
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