The True Sign of a Housing Recovery

by 27 Mar 2012
( -- 3/27/2012 -- For many observers and followers of the American real estate market, pricing is the only indicator of a strong recovery. While pricing is an important factor in terms of a bottom line point of view, the housing market is a lot more complex than median home prices.

Attempting to gauge the state of the housing recovery solely by looking at current prices is an exercise in disappointment. Looking at the downward trajectory of home prices since the peak year of 2006, it’s easy to think that a bottom has finally arrived. This is not quite the case, as home prices could still see further reduction. House flippers and other real estate investors who don’t believe in the value of long-term investing may be left waiting on the sidelines for a while. Housing prices could very well stay at their current record lows for a while longer, but that does not mean that a recovery is not underway.

Pricing Versus Sales Home prices may seem static now, but it will only be a matter of time until they catch up to the more dynamic indicator of home sales. When the American housing market was at one of its red-hot moments in 2005, sales moved at the vertiginous pace of 7 million per year. Home sales in 2010 were just 4.19 million, and a good number of those transactions were opportunistic short sales and purchases of distressed properties –hardly the signs of a vibrant real estate market. In 2011, however, the number of home sales climbed to 4.26 million. In the last six months, the record low mortgage interest rates and the heavily discounted inventory of homes have managed to stimulate the market significantly.

As a result, sales have increased by 13 percent and are expected to continue rising, based on recent comments by the National Association of Realtors. The number of pending home sales –transactions in which buyers have signed purchase contracts- is currently at a two year high. Forecasts for sales in 2012 call for 4.93 million transactions, a significant number that is sure to send home prices back on an upward direction, albeit slower than some impatient investors are hoping for.

The current inventory of unsold homes is at 6.1 months. In a stable housing market, that inventory should remain at under six months. That number could grow in the near future, however, as the five major banks involved in the recent foreclosure settlement agreement resume their processes of mortgage default, eviction and repossession. Some estimates indicate that up to 3 million homeowners could lose their properties to foreclosure in the next few years.


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