Talk of a housing recovery is pervasive in the media these days. A quick Google News search on "housing recovery" yields 59,600 headlines published this month, from major outlets like the Wall Street Journal, the New York Times, CNBC and the Chicago Tribune.
There are definitely "green shoots" data out there showing upward momentum in many housing-related sectors after the multi-year declines we've been experiencing. For example, here's a piece from today's Wall Street Journal:
From Power Tools to Carpets, Housing Recovery Signs Mount
The U.S. housing recovery is starting to show up in corporate results.
Companies that sell power tools, air conditioners, carpet fibers, furniture and cement mixers are reporting stronger sales for the fourth quarter, providing further evidence that a turnaround in the housing market is taking hold.
The results add to data on home construction and pricing that indicate a bottom may have been reached after the sector's long slide. While the incoming data continue to be mixed, evidence that Americans are spending more to build and refurbish homes is raising executives' confidence that the housing market will continue to improve and help fuel the broader economy.
The key question, which you're asking, is: how sustainable is this 'recovery'?
I have not conducted enough analysis to weigh in on this in an informed manner. But I like the data and argument put forth in this article from Lance Roberts:
The housing recovery is ultimately a story of the "real" unemployment situation which still shows that roughly a quarter of the home buying cohort are unemployed and living at home with their parents. The remaining members of the home buying, household formation, contingent are employed but at lower ends of the pay scale and are choosing to rent due to budgetary considerations. Also, we should not discount the psychology of home ownership has dramatically changed since the crash as many of the "millennials" saw the financial damage their parents suffered and are opting out of taking such a perceived risk.
As I stated recently the optimism over the housing recovery has gotten well ahead of the underlying fundamentals. The overarching problem is that the housing market that is almost exclusively dependent on the continued push to artificially suppress interest rates combined with massive amounts of direct stimulus, and incentives, to bailout current homeowners and banks. This intervention is causing an artificial supply suppression which is likely to create a backlash in the future as the current supply/demand conditions are unsustainable.
While the belief was that the Government, and Fed's, interventions would ignite the housing market creating an self-perpetuating recovery in the economy - it did not turn out that way. Today, these repeated intrusions are having a diminished rate of return and the risk now is that interest rates rise shutting potential homebuyers out of the market. It is likely that in 2013 housing will begin to stabilize at historically low levels and the economic contribution will remain fairly weak. The downside risk to that view is the impact of higher taxes, stagnant wage growth, re-defaults of the 6-million modifications and workouts, elevated defaults of underwater homeowners and a slowdown of speculative investment due to reduced profit margins. While many hopes have been pinned on the 2012 stimulus fueled, China investing, and supply deprived housing recovery as "the" driver of economic growth in 2013 - the data suggest that may be quite a bit of wishful thinking.
On the other hand, I've been surprised to see such a data-driven and (I've thought) impartial analyst as Bill McBride from CalculatedRISK turn optimistic on housing.
From his interview with BusinessInsider:
I’m not a roaring bull, but looking forward, this is the best shape we’ve been in since ’97.
And further from his own blog:
Obviously the economy is still sluggish, and the unemployment rate is very high at 7.9%, but I was looking forward. I mentioned the downside risks from Europe and US policymakers (the fiscal slope), but I think the next few years could see a pickup in growth.
In the article I highlighted two of the reasons I expect a pickup in growth that I've mentioned before on the blog; a further increase in residential investment, and the end of the drag from state and local government cutbacks.
Bill's sanguine outlook troubles me, because it feels different than what I believe should be the case. To me, there are too many economic risks to the downside to merit a rebound in housing prices of any substance. I certainly haven't seen any wage or savings increase data that would indicate the average American can suddenly afford to pay more for a house.
Lastly, anecdotally, I see two stories from where I live in Northern California.
In my new, more working class town, many homeowners are still underwater. Despite that, many of those who want to buy a house are having a difficult time because prices are still higher than they can afford. And inventory is very low. But prices have started slowly increasing again for the first time since the 2007 bust.
Back in Silicon Valley, it's like 1999 on steroids. There's a ton of money chasing little inventory. A single-family starter home that isn't a tear-down starts around $1mil. Multiple bids are back with a vengeance. Average rent for a no-frills 3bd/2ba home is around $5k/mo. As I have done for years, I wonder When they heck will they run out of people who can afford to pay these prices? In my bones, I don't believe this is sustainable, but the housing market action there has run counter to my intuition for nearly two decades.
Neither of these two stories provides me with a rationale that housing should re-enter a boom time.
But nothing goes up or down in a straight line, and the housing industry (on average of course, because local markets have wide variation) has been depressed for years now. Some modest growth (or "recovery") could be in store if no major economic shoes drop over the next year or two (a big "if").
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