Housing: “Full Recovery” or “On the Mend”?

home prices upI loved the cover story for Barron’s on Saturday. Jonathan Laing’s article announced that the “national nightmare is over, home prices are headed up and the recovery is for real.” Wouldn’t it be great if he’s right?  After six years of major declines in home prices wiping out $7 trillion in home values, we’re all ready for a big turnaround. Unfortunately, though housing is certainly on the mend, a full recovery may still be far off.

Mr. Laing, of course, pointed to the Case-Shiller report that showed a jump in home prices of 2.3% in June over May and a 6.9% increase in second quarter 2012 compared to first quarter. He pointed to optimistic reports such as Moody’s Analytics’ Mark Zandi who feels home prices on average will rise 10% by the end of 2014. And, Lawrence Yun, chief economist of the National Association of Realtors, thinks that home prices could increase by as much as 5% in both 2012 and next year, in part due to lower inventory of houses for sale. Lastly, Ingo Winzer, president of Local Market Monitor is forecasting a cumulative increase of 7% over the next three years.

Others are not so optimistic. Nick Timiraos, in the Wall Street Journal on Monday, indicated that the strong sales in early 2012 signal that more U.S. housing markets have hit bottom. However, in his words, the housing market “remains far from normal.” In addition, “hitting a bottom shouldn’t be confused with a recovery, which looks a ways off.”

Here are some reasons that Mr. Timiraos, Barry Ritholtz and others believe that housing has stabilized but we are not in recovery mode:

  1. The economy is still limping along- consider weak job creation, flat wages and low household formation.
  2. The foreclosure process was slowed or halted for almost a year as part of the “robosigning” settlement discussions. Distressed sales fell from 38% to 28% of existing home sales. Now that this issue has been resolved, foreclosures are moving higher, putting more distressed houses on the market. This will likely reduce the average price of houses sold.
  3. Low inventory is not necessarily good. Home equity plunged in the last six years. Many homeowners would like to move on. But, they become buyers after they sell, and if they won’t have enough equity after the sale to buy, then they sit.
  4. Mortgage rates are at historical lows. Buyers get a huge increase in purchasing power with these low rates. What happens to home prices when mortgage rates start to rise?
  5. Results must be seasonally adjusted. Second and third quarters are historically the best months for home sales. Let’s see what the fall and winter bring.

There are good signs in housing. Yet, there are still plenty of headwinds before we see a return to normal. Regardless, it appears that housing has stabilized and hit bottom in parts of the country. That’s good news.