Friday, November 16, 2012

2012 in Review: All Signs Point to a Rebounding Market

Last year at this time, I wrote about a housing rebound that had been delayed due to a combination of poor consumer confidence, tighter credit standards, stubbornly high unemployment and foreclosures that continued to hammer prices.  Yet what a difference a year makes!

To be sure, we do continue to muddle along with a level of economic growth that is much lower than what we’d expect, but that’s largely because of the cuts in the public sector.  And yet, contrary to what you might have heard in this year’s election season, growth in the private sector alone continues more or less at an average pace – it only seems slow because it grew much faster following previous recessions.

Fortunately, the housing market itself seems to be on its own trajectory, and continues to heal after the worst downturn since the Great Depression. For the month of September, seasonally adjusted annual new home sales rose by 5.7% over August totals to 389,000 units, and are up by 27.1% year-over-year.  At the same time, median prices are up by 11.5% over the last year, while inventory fell from 4.7 to 4.5 months.

Not surprisingly, builders are in a very good mood over this trend, with the NAHB Housing Market Index (HMI) rising for the sixth month in a row through October to 41 – the best showing since June of 2006.  They should be happy:  according to the Wells Fargo/NAHB Housing Opportunity Index (HOI), a combination of lower prices and rock-bottom interest rates meant that 74.1% of potential homebuyers nationally could afford the median-priced home during the third quarter of 2012, up substantially from the last trough of 40.4 noted in the same quarter of 2006.

The number of markets on the First American/NAHB Improving Markets Index (IMI) rose for the third straight month in November to 121 versus just 30 a year ago. The stock market has certainly taken notice, with the Dow Jones U.S. Home Construction Index, which tracks seven public builders, rising by 80% from January through November of 2012 and by 134% since August of 2011.

Existing home sales are also on the mend, dropping slightly in September from August totals, but still up by 11% year over year.  With fewer distressed sales in the mix, prices have also rebounded by 11%, while inventory has fallen to 5.9 months – the first time in several years that this index has fallen below 6.0 months.  Even better, the average time it takes to sell an existing home has fallen from 101 to 70 days.

Of course builders are celebrating by pulling permits and starting new homes.  In September, they pulled a seasonally adjusted annual total of nearly 895,000 units, for an increase of 11.6% over the previous month and 45.1% over the same month of 2011.  Housing starts also rose impressively to 872,000 units per year in September, for an increase of 15% since August and by about 35% year over year.

It’s certainly not just home builders who are more confident, it’s the entire construction industry.  Through September 2012, construction spending in the U.S. rose by nearly 8% over the past year to an annual total of $851.6 billion – the highest level in almost three years.  And, according to the findings of the most recent Emerging Trends in Real Estate 2013 report issued by PwC US and the ULI, modest gains in leasing, rents and pricing will gradually extend across all U.S. market for all sectors.

To be sure, there remain some considerable concerns and uncertainties which lie ahead, most of which are not under the control of builders and developers.  While half the country licks its wounds following the latest Presidential election, all of us hope that we can avoid the much-discussed ‘fiscal cliff’ (which is actually more of a hill because the impact to the recession would be gradual and not sudden should Washington gridlock continue through January).  Still, given that 70% of U.S. construction spending is for non-residential projects, any abrupt pull-back in government-funded projects or immediate tax increases could have an outsize impact on the industry.

For now, there are multiple signs pointing to the long-awaited housing rebound.  During their years in hibernation, most builders had to improve their designs and green building techniques in order to compete not just with cheaper and older homes, but even the homes they built themselves during the boom years. Despite the pain and toil that entailed, something tells me they’re now more than ready to put those lessons to good use.

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