US housing market pointing the right way

Home prices have fallen on average 33 percent across the USA since the housing bubble burst in 2006, which is higher than the deflation seen during the Great Depression. But now the US housing market, which played one of the biggest roles in precipitating the world’s financial crisis, is showing some of the strongest signs of recovery, according to American industry analysts who have been taking a look at recent existing-home sales.

While admitting home sales “are relatively still low,” Paul Dales, chief economist at Capital Economics, says “it is clear that the US housing recovery is now well underway,” citing the evidence that home sales have been on the rise for the past three months and posted a 5 percent increase in December.

Lawrence Yun, chief economist of America’s National Association of Realtors (NAR), concurs with Dales’ assessment, saying, “The pattern of home sales in recent months demonstrates a market in recovery.” In addition to the 5 percent increase in December, NAR reported a 1.7 percent annual increase in existing-home sales in 2011, totaling 4.26 million homes for the year. Yun suggests consumers are gaining confidence from “record low mortgage interest rates, job growth and bargain home prices.”

Distressed homes made up 32 percent of sales in December, according to NAR’s existing home sales report for the month, while foreclosed home sales closed at about 22 percent below market rate in December, a discount two percent higher than that recorded a year earlier.

Investor demand remains steady, with 21 percent of the total homes sold in December going to investors, which is up from the 19 percent of purchases recorded in November and the 20 percent figure one year ago. Cash sales – predominately linked to investors – made up 31 percent of December’s existing-home sales, compared to 28 percent in November and 29 percent a year ago.

Purchases by first-time home buyers declined in December – both from the previous month and the previous year. First-time home buyers accounted for 31 percent of purchases in December, down from 35 percent in November and 33 percent in December 2010.

According to NAR, housing inventory is on the decline and fell to its lowest level since March 2005, with approximately 2.3 million homes available on the market last month. “The inventory supply suggests many markets will continue to see prices stabilize or grow moderately in the near future,” Yun said.

However, there are still many factors to consider that may temper an overly optimistic outlook. Listed inventory which is performing well is only part of the equation, and according to CoreLogic’s latest numbers, the shadow inventory of homes in distress that have yet to hit the market, stands at about 1.6 million. At some point, interest rates will start rising back toward the long-term median of 8.9% from the current 4%. Depending when and how quickly, the jump would make homes much less affordable for the average American family.

Regardless, Dales believes sales will rise this year. “Housing still won’t contribute much to GDP growth over the next few years, but at least it will no longer subtract from it,” Dales says.