U.S. Housing Recovery Is Taking Hold, But Analysts Say Challenges Remain

After years of tenuous signals, the U.S. housing recovery is now finally on better footing, said credit analysts and researchers at the Standard & Poor’s Ratings Services’ Housing and Commercial Real Estate Roundtable, held on April 9, 2013, in San Francisco.

Why is this time different? The most critical indicator is home prices, which increased 6.8% nationally in 2012 and which Standard & Poor’s expects to grow by another 8% in 2013–after having plunged more than 30% during the housing meltdown. “Rising prices are a good cure for a lot of headaches,” said Erkan Erturk, a senior director in Standard & Poor’s Structured Finance Research Group. “Prices also provide a good summary of the broader housing market.”

Robust sales activity, falling but still elevated delinquency and foreclosure sales, and higher homebuilding and housing stock prices are also key indicators that the sector is rebounding.

“There were a few false recoveries in 2010, driven by tax credits and other government supports,” said Mr. Erturk. The housing market had bounced around the bottom for several years, but a recovery began shaping up in late 2011 into 2012. “2012 was a significant year–the recovery was strong, and the turnaround came faster than we’d anticipated,” said Mr. Erturk.

Shadow inventory (including seriously distressed properties, properties in foreclosure or owned by banks, but not yet on the market) is diminishing because of rising home prices, which are also pushing about 2 million more homeowners into positive equity positions. According to Mr. Erturk, price-to-rent and price-to-income ratios indicate fair-to-under valuation, meaning it’s still a good time to buy homes because affordability is high and homeownership is cheaper than renting.

Despite improving housing indicators, a full recovery will still take time before imbalances–both regionally and nationally–are corrected. One such imbalance is the gap between new and existing median home prices, which stands at 40%. “In the long run,” said Mr. Erturk, “we would need to see existing median home prices rise to be consistent with historical 20% levels.”

Distortions from government intervention continue, such as the Federal Reserve buying mortgage-backed securities to keep low mortgage rates. “So, you could argue if the support disappeared, the market couldn’t sustain the recovery,” he said, adding: “Overall, housing is positive, but challenges remain.”

To varying degrees, these positive developments are cascading into housing subsectors.

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