Henry Has It

After half a decade of withering sales and slumping prices, there are strong and diverse signs that the single-family housing market is poised for a rebound.  Industry analysts and players cite a number of reasons - some traditional (employment), others unique to the post-credit bubble era (foreclosures) - for the long-awaited sea change. An analysis of industry and government data also support the forecast.

"It has become increasingly apparent to us that the pieces for a housing increase are in place," declared Barclays Capital analyst Stephen Kim in a recent note to investors.  "With the exception of a few really hard-hit markets, the vast majority is ready to turn around," adds Jerry Howard, president and CEO of the National Association of Home Builders, NAHB.  "The Washington, D.C., area is not only ripe for recovery, they need to start building more homes and units."

The catalysts to recovery are mostly the same: for potential buyers, residential rents have now risen enough to consider buying; existing-home inventory is the lowest in five years, while that of new homes is at a 40-year low; affordability is at a record high; delinquencies have peaked; consumer confidence is on the rise ; and job growth is accelerating.

For investors, with a continuation of the gold rally in question, real estate is beginning to look like a viable inflation hedge alternative, while rising rents mean greater profits.  "We believe there is sizable housing demand that could be released into the market," says Lawrence Yun, chief economist of the National Association of Realtors, NAR.  The NAR is forecasting existing home sales will rise 5 percent in both 2012 and 2013; prices will edge up 2 percent in each of those two years, then 4 percent in 2014.  The NAHB is forecasting a 5.1-percent increase in new home sales and a 10-percent increase for new home starts in 2012.

JOBS, JOBS, JOBS
The economy has created jobs 13 months in a row for a total of almost 1.9 million. Weekly jobless claims have been routinely below the key level of 400,000, and the national jobless rate is down to 8.6 percent.
A new index by the NAHB and First American, the Improving Markets Index, IMI, launched in September, tracks housing markets throughout the country that are showing signs of improving economic health. Thirty cities - including San Jose, Pittsburgh, New Orleans and Winston-Salem, N.C. - are showing growth in permits, sales and employment.
In San Diego - where in the last year the jobless rate has fallen from 10.4 percent to 9.7 percent and 24,000 jobs have been added - home inventory is down to two months; in some areas of San Francisco (9.4 vs. 10.3 percent), it is one month.

LOCATION, LOCATION, LOCATION
There's even a strong case to be made that the foreclosure crisis is easing.  For the first nine months of 2011, foreclosure activity is down sharply from the same period last year (26.59 percent), according to RealtyTrac, which tracks the data.
It's unclear how many new properties will hit the market, but conservative estimates put the number at over a million.

Still, of the top 20 markets in the new wave, nine are in California, five in Florida and two in Ohio, according RealtyTrac, so the impact will be fairly concentrated.  If the market is in fact recovering, why would banks want to weaken it again by deluging it with cheap properties.  "You could see them trying to gauge the market like speculators," answers Howard.

A contributing element to that is the unwinding of government intervention - whether to artificially spur demand - as was the case with the first-time buyer tax incentive program of 2009 and 2010 - and/or to retard and prevent foreclosures.
Many regard those efforts as largely ineffective, if not counter-productive because they delayed the inevitable - a deep descent to a market bottom, which has finally been touched.
"The numbers you're looking at you can trust," says Kim. "There are no exogenous factors."  "You're back to the natural forces of the market," says Howard of the builders association.

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See full article featured in CNBC, "Residential Housing Ready to Awaken?"