How Real is the Housing Recovery?

by 23 Nov 2012

The latest housing reports from the United States Department of Commerce are very positive, particularly with regard to housing starts. October saw the highest increase in new construction activity since July 2008, and a specific statistic that is closely followed by traders on Wall Street is closer to becoming a reality. When the number of seasonally-adjusted housing starts reaches the one million mark, Wall Street traders become optimistic and start looking at real estate operations as worthy of investing in.

The number of housing starts sat at 894,000 in October, far more than the 840,000 estimated by economists. Upon closer inspection, however, the number of single-family residences breaking ground did not increase too much. The real momentum is in multifamily structures like condominiums, apartment buildings and town home subdivisions for renters. Wall Street analysts have dissected the record number of housing starts experienced in 2006 as a baseline comparison. The 2.2 million housing starts back then are now considered to have been unrealistic.

The Ten-Year Average

The number of housing starts needed to maintain a healthy and stable housing market is 1.2 million units over a ten-year period. Going over this average over a sustained period would signal another housing bubble, something that finance regulators are intent on avoiding through a series of measures and stopgaps. 

If the 1.2 million housing starts level is reached by mostly building multifamily projects, however, the recovery could be considered to be artificial and unsustainable. The rate of homeownership in America has tumbled significantly due to factors such as negative equity, foreclosures and tight mortgage lending. Without a steady and significant participation of first-time home buyers, the recovery may lose steam and fall into a rut.

Home Prices Still Questioned

Recent reports on real estate pricing also show gradual appreciation instead of the plunge seen after 2008. While everyone hopes that home prices will continue to rise along with steady sales, some analysts are still concerned that the housing markets that did not experience a vertiginous drop over the last few years could do so in the near future. The basis for this belief lies in the shadow inventory of underwater mortgages and pending foreclosures.

A real housing recovery is presumably on the way, but not until the majority of housing starts are single-family homes and first-time home buyers can once again participate in the market with confidence.

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