Housing Is Nearing an Important Phase of the 'Recovery'
Will demand soak up excess supply and fuel a self-sustaining recovery? Or will the recovery fizzle out and beg for more QE?
From late 2007 through much of 2011, housing bears dominated the conversation. Bulls couldn't get a word in edgewise. And, as the data dragged lower, bulls simply moved to the sidelines. Even the slightest contrarian peep could risk their reputation. Bears seized on this opportunity and crushed their hopes and infiltrated their dreams. It was just plain ugly. And deserved. The industry had fallen hard and far from the tree. A role reversal of sorts.
It wasn't until 2011 that housing bulls felt comfortable saying housing had "stabilized." And even this fairly neutral term that doctors use when speaking about a patient is still met by housing bears with rolled eyes. Heck, even I just rolled my eyes. The effects still linger and current sentiment leans bearish. So the contrarian side of me thinks this recovery phase may have a bit more gas in the tank than many think.
But that's the short-term view. And much of that view has been signed, sealed, and delivered by the Federal Reserve. With love, mind you. Intervention and a submerge-and-hold strategy on interest rates have allowed the housing industry to "stabilize" for the time being. But similar to holding a ball under water, when it starts to move against you, it can move fast. And that is numero uno on the bears' big scary argument list.
But bulls are eager to counter that rising rates can also indicate an extended recovery… Say it isn't so? Jokes aside, the long-term outlook is hazy with a chance of witchcraft (sorry, can't stop myself). OK, so let's get to the arguments, both valid as we near a pivotal crossroads for one of the visible and integral pieces to our economy:
2. Weak recovery (see Housing Index chart). So many folks have re-financed that there's no incentive to move/trade up.
3. Emotional scars combined with higher credit and down payment requirements are pushing many out of the equation.
4. Investment funded multi-family units are leading the way and indicative of desire to rent, not own.
5. Recent data showed that the amount of homes for sale climbed to a 10 month high, likely indicative of a backlog of foreclosed properties hitting the market. Foreclosed and distressed properties have equated to roughly 35% of total demand.
2. Supply slowly working off and low rates increasing appetite to own again - increase in jobs making it more affordable.
3. Homebuilders are seeing a mild uptick in activity as indicated by the recent rise in the SPDR S&P Homebuilders ETF (XHB).
4. Recent data showed the median home price increasing for the first time since November 2010.
5. Owners have to work hard to own a home again, which fits better with the "American dream."
Fragile as it may be, housing is nearing an important phase of the "recovery." Will demand soak up excess supply and fuel a self-sustaining recovery? Or will the recovery fizzle out and beg for more QE?
I have my doubts about the strength of the recovery, but regardless of my slant, I do understand this: Time and price will be the final arbiters. When bubbles burst, markets need time to run the financial sickness through the system and price discovery to create and move the marketplace forward.
Right now, Fed intervention is masking both. To what degree, I don't know. But I'm pretty sure we'll have a better handle on housing when "QE" fades from our everyday life and into the history books.
Editor's Note: Andrew Nyquist is an independent investor based in the Minneapolis area. This article originally appeared on his investing and economics site, See It Market. His writings also appear on Minyanville's blog community.
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