Is Real Estate Ready for a Nap?

Q3 real estate sales were strong; Q4 looks good too, but ...

By Ethan Roberts, InvestorPlace Contributor

While breaking down the real estate market three months ago, I noted that conditions were improving and were likely to continue that way into the third quarter, despite some overall problems in the industry.

That good feeling has now been confirmed by several recent measures.

This week’s S&P/Case-Shiller Home Price Indices of 20 cities nationwide was up for a sixth consecutive month, edging ahead 0.4%. It was about a half-percent lower than economic forecasts had expected; however, national home prices were up 1.2% from the previous year.

David Blitzer, the chairman of the index committee at Standard & Poor’s, was quite positive, stating, “All in all, we are more optimistic about housing. Upbeat trends continue.”

Plus, last month, the S&P/Case-Shiller Home Price Indices showed that all three headline composites (National, 10 City and 20 City) ended Q2 with positive annual appreciation rates for the first time since summer 2010.

Also this week, the Federal Housing Finance Agency mirrored the S&P report, saying that home prices rose for the seventh consecutive month in July, by 0.2%.

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While these numbers were not huge, the fact that all three composites increased was a notable and positive event. The chart below shows the long-term Case-Shiller trend for all three composites. You can see that it bottomed in 2009, and after another small pullback into negative territory, the trend is moving higher again.

Also this past quarter, we saw improvements in the sales of existing homes and condominiums. August resales were 7.8% higher than July, and total sales were the highest since May, 2010. Many Realtors are saying this year will be the strongest for sales since 2007.

Much of the credit for the strong sales is going to near-record interest rates in the mid-3% range for 30-year loans. However, the irony is that almost one-third of the resales in August were purchased with all cash — so interest rates are less of a factor than one would expect.

Perhaps buyers are now so conditioned to low interest rates that it no longer excites them. But when people become complacent, it usually takes a spike in interest rates to spur more home buying, as buyers try to lock in their purchase before it becomes more expensive.

New Construction Also Improves

August new home sales actually were down 0.3% from July, but prices increased and now are at five-year highs. More importantly, new construction sales for August were 27.7% above August 2011 results.

Single-family home starts also were strong, up 5.5% from July to August, but multi-family starts fell by a similar margin. Still, multi-family construction continues to outweigh construction on single-family homes.

When compared to recent history, 2012 sales numbers and construction starts are similar to where the housing market was in the late 1990s. The results are fairly decent, but nowhere near the boom years of 2003 to 2006. However, given that the unemployment rate continues to hover above 8%, these figures certainly are better than expected. Of course, many of the sales — especially of condominiums and townhomes — are to investors because of the ever-increasing number of renters.

Everything Else Feels Good, Too

What is especially noteworthy is the gain in confidence among both investors and builders. The National Association of Home Builders/Wells Fargo Housing Market Index increased in September for the fifth consecutive month, hitting a level of 40, the highest it has been since June, 2006.

Additionally, all three Housing Market Index components rose in September. This includes current sales conditions, sales prospects over the next six months, and traffic of prospective buyers. However, remember that any reading below 50 still is considered negative, and improvements in new construction of single-family homes will largely be determined by future job growth — or a lack therof.

We also are seeing some improvement in perception among the general public. Along with an increase in the consumer confidence numbers this week, the number of people who believe their homes will appreciate over the next 12 months has also been rising.

All this has helped homebuilders and other housing-affected stocks take their place among some of the market’s best-performing stocks, with D.R. Horton (NYSE:DHI, +75%), Whirlpool (NYSE:WHR, +78%), Lennar (NYSE:LEN, +86%) and PulteGroup (NYSE:PHM, +164%) all ranking in the S&P 500’s best stocks year-to-date in 2012.

Issues at Hand

Looking ahead to the third-quarter results, when they are all reported, I believe we will see a continuation in the solid numbers of closed sales. This is remarkable, considering that many pending sales still fall apart before closing because of tighter lending standards, properties not appraising for the sales price and occasional title problems on foreclosure sales.

A potential problem for the real estate market is that the government continues to quietly sneak more costs into the borrowing process.

FHA loans are becoming more expensive, as the Federal Housing Authority looks for ways to make up for lost revenue thanks to ongoing higher rates of default on their loans. Consumers will not notice the slight increases in interest rates or fees now, but should rates go up later on, these nickel-and-dime increases could become burdensome for potential home buyers.

But the greatest threat remains the 2 million foreclosure homes that still have not hit the market.

Banks continue to hold onto these, releasing very few; as a result, the lack of inventory has stabilized prices and created demand among investors. The question is, will they continue to do this, or will they eventually begin to flood the market with more distress sales?

That still is the great mystery of the housing market, and may well determine where prices go over the next quarter or two.

We are either at the beginning of a new uptrend, or we have just been pulled into one great head fake before prices come crashing down again.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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