The Ho-Hum Truth About the Housing Market

Boom?! Bust?! Calm down, pundits -- it's neither.

By James Brumley, InvestorPlace Feature Writer

Are you one of the many investors who is certain that, despite a rough five years, the real estate market hasn’t yet begun to feel the pain it’s due? Well, I’ve got bad news for you — the housing market is recovering.

Conversely, are you part of the smaller crowd that’s convinced the real estate market is about to go ballistic again, as it did in the early 2000s? Well, I’ve got bad news for you, too — the rebound is tepid, and is bound to stay tepid for a while (read: years).

SPFF: A Preferred Way to Get Yield?
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The truth is somewhere in the middle of all the wild predictions that the financial media seems to love trumpeting right now.

I know, I know … how boring, how uninspired. That’s fine. I’d rather be uninspired with the truth than be on pins and needles because of a misconception.

With that in mind, here are all the facts about housing and construction market — like ’em or not. And just so you know, the data nuggets are only a means to an end. There’s a bigger picture being painted here, once you’ve got the numbers.

Numbers Don’t Lie

First and foremost, yes, more houses are being sold right now. In May of this year, existing-home sales reached an annualized (and seasonally adjusted) rate of 4.55 million per year. It’s not as red-hot as the mid-2005 peak at an annualized rate of 6.34 million. But, it’s sure a lot better than the multiyear-low rate of 3.83 million hit in mid-2010.

As for new-home sales, in May, the annual rate reached 369,000. That’s still proverbial light-years away from the peak rate around 1.3 million, seen in 2005. On the other hand, it’s significantly better than the lull to an annualized rate of 273,000 from February 2011.

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And just for the record, May’s numbers weren’t a stroke of luck. Both data sets have been inching higher for a little more than a year now.

Here’s the amazing part: There are only 2.49 million existing (not new construction) houses for sale right now, which is a supply that would last only about 6.5 months. That’s well below the record level of 4.04 million homes for sale in July 2007, which was the peak of the financial (and housing) crisis.

Along those same lines, only 145,000 new homes are on the market at this time, which is the lowest number we’ve seen in — this isn’t a misprint — decades. It’s a supply of only 4.7 months.

And just to answer the question before it’s asked, home price trends have roughly, though not with perfection, been improving with the increase in real estate purchasing activity.

Got your arms around all that? Great.

Not As Bad As It Feels

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The apparent trend is all well and good, except for one thing: What about the housing inventory we’re not seeing because it’s not on the market yet? Once it hits the market, surely it will torpedo rebounding real estate, right?

That’s the argument, anyway, though perhaps a little background is in order if you’ve been out of the real estate loop.

Remember the robo-signing scandal that put some egg on mortgage lenders’ faces last year? In simplest terms, banks and lenders were foreclosing on folks through an automated process rather than having the decency to look at a delinquent borrower’s case with human eyeballs. Once the practice was exposed (and corrected), these banks were forced to revamp the entire foreclosure process, which in turn meant the bulk of would-be foreclosures for the past several months have been put on hold until … well, about right now. Thing is, since it can take up to a year to finish foreclosure proceedings, that means all those back-logged foreclosures are going to flood the market — in 2013.

This is where it gets interesting, but also frustrating for a numbers guy like me.

While the potential inventory flood is something skeptics are understandably worried about, a bunch of investors as well as pundits have come to some unfounded conclusions about what could happen to the real estate market once that bank-owned property goes up for sale in 2013.

My guess is they’re making decisions based on what they’re seeing happen to neighbors across the street, or what they’re hearing from other people at work. It’s a gut-based decision instead of a rationalized decision, however, because they don’t actually know the number.

I do know the number, though. It’s 629,000. That’s how many homes are currently owned by banks and mortgage lenders. It will take about 15 months to sell those homes, based on current sales rates. While those are selling, the banking industry is repossessing houses at a rate of 700,000 per year, at least according to RealtyTrac. My guess is, by this time next year, bank-owned real estate will be somewhere around 850,000 properties … though the rate of foreclosures is actually falling now.

It’s a big number, sure, but I don’t see it as the ticking time bomb the rest of the market sees. Here’s why:

Crunching the Numbers

Adding what probably will be about 850,000 foreclosed houses to the current inventory of 2.5 million existing homes for sale brings the figure up to 3.35 million. Ladies and gents, that’s still just about the average of a multiyear range, the tail end of which played host to the current recovery.

Moreover, with only 145,000 new houses on the market right now, the total current and future inventory will remain at rock-bottom levels.

Let’s be generous, though, and say the total “new” inventory ramps up to 300,000 homes a year from now (which would be a monumental feat for the construction industry). Then, the total mid-2013 inventory of all houses — bank-owned, plus new, plus existing — still would be something around 3.65 million homes based on current levels and trends. That’s still an amazingly low “overall” inventory number.

Translation: The current market can absorb all those foreclosed properties when they hit the market in 2013. It won’t be a blip-free introduction, but it’s not going to kill the market either.

Bottom Line

Sorry for the lengthy math lesson, but it was a necessary evil. Housing isn’t bad, and housing isn’t great. Housing is just OK, which is at least better than it was a couple of years ago.

More important than any of that, however, is that housing is likely to continue improving at its tepid pace without any severe inventory-overhang worries. It might be a boring outlook, but I’ll take boring. Boring is sustainable.

Article printed from InvestorPlace Media,

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