Recovery for the Real Estate Market

Reddit

There’s no doubt the U.S. equity markets are in the midst of a decent upside run. Take a look at this chart of the S&P 500 – a good stand-in for the broader U.S. stock market…

As you can see, after bouncing off 673 on March 9, the S&P 500 has surged a stunning 23% as of last Friday. That’s some seriously bullish action.

The market has also bounced on higher average volume, which is indicated on the volume section of the chart by the black line. Significant? Certainly. When market moves to the upside are driven by higher-than-average volume, it’s a clear sign that bullish investors are getting involved and are willing to buy shares to prove it.

But that’s not all. To find a similar bounce to the one we’re in the midst of right now, I have to go all the way back to last November. Then, the S&P surged from a low of 741 to 944 in January. That translated to a 203-point upswing, or a whopping 27% upside run.

My take: A bounce similar to the one we’re in right now ignited a move of nearly one-third in U.S. stock prices just a few months ago. Considering that we’ve moved 23% in just a matter of days, my thoughts are the recent surge has decent legs.

Sure, we’re not out of the woods yet, not by any stretch of the imagination. But facts are facts, and the recent market action bears that out: We’re moving in the right direction… especially in one of the most important sectors – real estate.

Ever since the financial crisis began, I’ve said that one of the big triggers of a decent, well-founded recovery – in the economy and the stock market – will be an improvement in the real estate sector. And while the latest news isn’t mind-blowing, there are a few positive morsels.

Remember, I’m looking for positive moves in real estate for a simple reason: Improvement in this sector means increased sales and stabilization in prices. That, in turn, will ignite new lending. After all, with reliable prices and positive sales movement, homebuyers know what they’re buying won’t get crushed. And lenders know what they’re lending will likely be paid back.

Now, even when the real estate market recovers, we’re not going to see the surge in prices and buying that started one of the biggest asset bubbles of all times. A ton of that was fueled by underqualified borrowers and downright lousy lending practices. And while banks have short memories, they aren’t that short.

Rather, the recovery in real estate will begin with baby steps: small moves in the right direction. And the latest news is just that. Take a look…

As you can see from this chart, existing home sales in February jumped to the upside. In fact, compared with January, home sales were up 2.6% in the West, 6.1% in the South and a whopping 15.6% in the West. All told, existing home sales in the United States increased a solid 5.1%!

The news gets better. Sales comparisons with the same period last year – which tend to be less volatile than month-over-month numbers – show some huge bright spots. In fact, while overall home sales in the United States were down 4.6% in February compared with last year, sales in the West were up a stunning 30.4%.

That’s right, February home sales in the West – which includes the super-important Southern California and Las Vegas real estate markets – rose nearly a third compared with last year. Plus, it marked the eighth straight month of year-over-year increases for the region.

Now get this: With the real estate market in the West generating a whopping 1.2 million units in annualized sales, sales activity is now a staggering 38% above its cyclical low point of 870,000 units marked in October 2007.

That means – from a sales angle – a market bottom in this key real estate region is way, way in… and has been so for months.

So what’s driving the bullish numbers in real estate sales? No surprise here: The median home price in February was just $165,400, 15% below its year-ago level.

Sure, we want to see these prices stabilize. But the fact is with 45% of home sales distressed – either in foreclosure or in short sales – these prices are going to take a hit. And while the process is painful, the market needs to clear off unwanted inventory before it can really begin to get back on its feet.

But mark my words: Lower prices aren’t going to last forever. And it’s not just because sales activity is beginning to accelerate. See for yourself…

As you can see from this graph, the National Association of Realtors says housing affordability is rising fast. In fact, at a current level of 167, home affordability is now 25% easier than the year-ago’s 133 level.

So what does a Housing Affordability Index (HAI) level of 167 really mean? It’s pretty straightforward. An index level of 100 means that the typical family earning the median income in the United States has exactly enough income to qualify for the average mortgage.

So with the HAI at a whopping 167, the average family in the U.S. has 167% of the income necessary to buy an average home. Talk about buying power!

Regards,

Wayne Burritt
for The Daily Reckoning Australia

P.S. Bottom line: The stock market is in the midst of a solid bounce. Plus, the real estate sector – a big key to a sustained recovery – is showing signs of life, especially in the important West region of the United States. Together, these factors point to more bullish action for stocks down the road.

Editor’s Note: Wayne Burritt has spent over 28 years as a financial writer, investment analyst and business developer. A natural teacher with a lot of knowledge to impart, Wayne takes great pride in sharing his expertise on the subject of options and investing with anyone willing to learn. Wayne believes that given the right teaching, anyone can become an expert in options. Currently Wayne shares his knowledge with the readers of Easy Money Options.

The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
Reddit

Comments

  1. What is this doing on this site. I don’t think I have ever seen a graph on this site with an exclamation point and your data series are so short term that no menaingful trend can be drawn. I certainly find this story reminiscent of real estate adverting that exagerates the upside and downplays any risks…. which I have a feeling was probably a part in this whole mess we find ourselves. At the very least, try to be more objective and less sensational.

    Reply
  2. For f’s sake, can we have more articles on Australia?

    All the Aussie RE bulls will say to this is “it’s different here”.

    The person who wrote this has kangaroos loose in his top paddock. You’d think the US was hard enough done by with rapidly rising unemployment and insolvent banks without more RE spruikers.

    Reply
  3. We need to start up something akin to “goldmoney.com” in the us, a payments system which bypasses the banks. the fractional reserve banking system is a parasite on the economy, particularly manufacturing. Lets return to gold backed currencies now!.

    Reply
  4. That’s really great news for the US.
    What about the RE markets in Auz?
    Can we extrapolate from this article, that the same will happen globally, or is this news just relevant to the US?

    technibyte
    April 15, 2009
    Reply
  5. Pete, the coverage of the real estate market in Oz is pretty lame, at best. You either get feed marketing data from the RE bulls or doom & gloom from the head to the hills/buy gold camp. Sadly there does not seem to be much analysis in between. I wonder why this is?

    Reply
  6. Greg: The answer is that the people with the raw information are liars. The people that have a lot of the raw information is the REIA (huge bias).

    Other information can be attained, but it comes at a cost. There is a lot of smoke and mirrors due to the stakes of the players.

    Although I disagree that the doom & gloom is necessarily the buy gold camp. You are lumping all of the real estate bears together, and they are not all the same at all.

    It doesn’t take a genius to look at the current RE market and see that something is wrong. Just because someone sees the problems, does not make them necessarily a ‘doom and gloomer’ or a gold bull.

    Besides, we can look at this positively. I am delighted that the market will right itself and that people won’t be forced into a lifetime of debt anymore. That’s a positive outcome for future generations, even if it means some pain in the near term.

    Reply
  7. Dear Dan
    I ahve been reading your magnificent daily for over 18 months and its a great read. Now I want to offer my view on The Real – Real Estate story and the FHOG.
    Its a wonderful scam that Kevin is pushing, every time he hands out a grant his Govt collects 10% of the purchase price, somewhere between $35,000 and $50,000 in GST. They will also collect 10% on everything purchased in connect with the buy, legals, and all household items and labour after they move in. The big increases in RE prices were substantially driven by tax policies introduced in and after 2000. Until that time the only tax inputs in residential RE was a sales tax which was levied on just a few construction items, and was 0% on the labour content. Established houses increased by 10% o/night to cover replacement costs. I have worked as a tax planning consultant since 1978 for small and some medium businesses and investors and have studied the costs of buying res. RE for over 15 years. My conclusion is that if any RE buyer buys a home FIRST he has nevr spent the time to analyse the deal in the correct way.
    I will shortly send you my “take” on RE strategy which does not include rushing into this RE market without careful research, there are always good buys in all markets – if researched taken up in the correct way.
    Keep up the oil Dan,
    Regards
    Anthony :-)

    Anthony Willcocks
    April 24, 2009
    Reply
  8. What do you guys think of the analysis at globalpropertyguide.com?

    First Home Buyer
    May 10, 2009
    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au