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Housing Recovery "Too Legit to Quit." - Yes: I just Quoted M.C. Hammer!

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by Louis Basenese Chief Investment Strategist, Wall Street Daily

We're less than one year into a legitimate recovery in prices, and already the pundits can't help but sound the alarm about another possible "bubble"? Give me a break!

Forget Rodney Dangerfield, the residential real estate rebound gets "no respect."

Don't worry. We're nowhere close to another peak. Nor has the profit potential for housing-related investments suddenly vanished.

Here are 10 hard facts to prove it...

1. Too Far, Too Fast? Nope!

Housing market bears point to the meteoric rise of homebuilding stocks as proof that the recovery has been too robust, too soon.

The S&P 1500 Homebuilder group is up 170% since hitting a low in August 2011. In the last year alone, many individual homebuilder stocks, like KB Home (KBH), PulteGroup Inc. (PHM) and Ryland Group (RYL), doubled in price.

As Bespoke Investment Group aptly points out, though, "Remember that 'too far, too fast' is relative." And, in this case, short-term relativity can be deceiving.

It turns out that the S&P 1500 Homebuilder group is still down 55% from its 2005 high, despite the impressive run-up over the last 18 months. Too far, too fast? I don't think so! 

2. Peak Activity? Nope!

Actual homebuilding and sales activity haven't peaked, either.

Based on the January data, single-family housing starts remain roughly 65% below the peak hit during the last boom. And they're about 40% below the long-term average since 1962. As far as existing home sales, we're still about 30% below peak levels. 

3. RFI is Back in the Black.  

Ever since 2005, the real estate market has been a drag on the U.S. economy. More specifically, residential fixed investment (RFI) weakened GDP growth.

Not anymore! In the fourth quarter, RFI added 0.4% to GDP growth.

In dollar terms, RFI needs to increase another 40% just to hit the long-term average since 1995. So forget being near a top. The latest data indicates that "the housing rebound is fairly entrenched at this point," as RBS Securities' economist, Omair Sharif, puts it.

Entrenched... with plenty of room to run, too. 

4. Less Distressed.  

Any talk about the housing market wouldn't be complete without mentioning the unending onslaught of foreclosures and short sales, which naturally hold back a recovery - particularly in prices. But (surprise, surprise) "distressed sales" are becoming less and less of a factor.

Notices of defaults, scheduled auctions, bank repossessions and other filings fell 28% in the last year, according to RealtyTrac. Perhaps even more telling is the fact that new foreclosure filings are at their lowest levels since June 2006.

As RealtyTrac's Daren Blomquist says, "We're now well past the peak of the foreclosure crisis." I'll say!

In all fairness, foreclosure filings are still running hot - at about twice the pace experienced in 2005. But we can't overlook the progress being made. In many hard-hit markets, foreclosure sales now account for a dramatically smaller portion of the market (see table below).

Take Las Vegas, for instance. In January 2012, foreclosures accounted for a staggering 45.5% of sales. Fast forward to today, though, and that figure has been more than cut in half, to 12.5%, according to calculations by economist, Thomas Lawler.

If we look at the short sale data, a similar trend is developing, too.

graph

Add it all up, and as Bill McBride of Calculatedriskblog.com says, "In every area that reports distressed sales, the share of distressed sales is down year-over-year - and down significantly in most areas."

That means conventional sales are picking up, which is "a major continued improvement for the market," according to Trulia.com's Chief Economist, Jed Kolko. I agree.

And once again, the data points to a market on the mend, not in bubble territory. 

5. No More Negative Equity for You!  

Aside from short sales and foreclosures, the other main factor holding back the real estate market has been the number of homeowners sidelined because of negative equity. But that's becoming less and less of an issue, too.

Thanks to rising prices, nearly two million homeowners were freed from negative equity over the last year, according to a report from Zillow.

6. Strengthening, But Not Overheating.    

Digging into the latest real estate price data reveals that prices rose in 19 out of the 20 markets tracked. But isn't that the sign of a top? Nope!

It's an indication of a strengthening market, not an overheated one. Or as HSBC (HBC) economist, Ryan Wang, said, "Last year was clearly a year of improvement, but there's still a long way to go."

A very long way to go, in fact.

As I've shared before, real estate prices remain well below their 2006 peaks. Even if prices increase another 6% to 7% this year, we'll still be comfortably below those levels.

So there's still plenty of room for prices to run. And we should expect them to run higher, too... 

7. It's All About Supply, Stupid!  

The latest existing home sales data from the National Association of Realtors (NAR) reveals a shocking lack of supply.

I've experienced it firsthand, too, as I've been buying and selling real estate in the Central Florida market recently.

In December, the nation's inventory of existing homes for sale fell nearly 5%, hitting the lowest level since December 1999. Year-over-year, inventories are down 25.3%.

And based on the current sales rate, the 1.74 million homes on the market will be gone in just 4.2 months.

Keep in mind, in a normal market, inventories typically check in at about a six-month supply. So forget about being overheated, we're still not even back to normal.

The end result? Simple economics dictates that increased demand and limited supply will lead to even more price increases.

Speaking of demand... 

8. Cheap and in Dire Need.  

Thanks to record-low interest rates, homes have never been more affordable. Ever.

The average rate on a 30-year fixed mortgage crossed the tape at 3.56% last week. That's within spitting distance of the record low of 3.31%.

Of course, a cheap product only sells if there are buyers to capitalize on the bargains. And in this case, there's no shortage.

Roughly one million new households will be formed this year. And those new people will need houses to live in.

By 2017, a total of six million new households will need a home, according to JP Morgan's (JPM) estimates.

So you can also forget about demand approaching a peak. It can only go up from here, as new home construction still isn't keeping up with new household formation. 

9. More Jobs, More Houses.  

Record affordability means nothing if Americans literally can't afford to buy a home.

But thanks to an improving employment market, buying a home is becoming an option again. The more the employment picture improves, the more we can expect the real estate market to pick up. 

10. Good Credit Now Required to Buy a House? Go Figure.

One of the major contributors to the last real estate mania was runaway lending. Anyone with a pulse could get a loan. Without documentation, no less.

The good news? We aren't returning to such dangerous lending practices during this recovery.

Right now, about 57% of approved mortgage applicants boast FICO scores above 740, compared to just 45% back in 2005, according to Jed Smith, Managing Director of Quantitative Research at the NAR.

He actually goes as far as saying, "We think financial institutions are requiring FICO scores that are excessively high."

You keep thinking that, Jed. In reality, insisting on higher credit scores is a good and responsible thing. It ensures that the real estate market doesn't get (way) ahead of itself, again.

Bottom line: In the famous words of M.C. Hammer, the real estate recovery is "too legit to quit." That's not just my opinion, either. It's based on hard data.

The Cascade Team Real Estate

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