Housing’s Fundamentals Call For Positive Outlook With Extreme Caution



While the recent news about housing has taken on a more positive tone, and a number of housing related stocks are going up, the basic fundamentals of the U.S. housing market are trending in a more dubious direction.

home sales data

Despite all the positive signs of late, those involved in housing need to remain cautious

The U.S. Census Total Housing Inventory Report shows rentals growing at a very significant pace. (think “bubble”) At the same time, this data shows that real home sales have been trending downward for years.

The National Association of Realtors is reporting that the November 2011 Pending Home Sales Index has reached “it’s highest level in 19 months”, but also contains the following comment:

“Lawrence Yun, NAR chief economist, said the gains may result partially from delayed transactions. “Housing affordability conditions are at a record high and there is a pent-up demand from buyers who’ve been on the sidelines, but contract failures have been running unusually high. Some of the increase in pending home sales appears to be from buyers recommitting after an initial contract ran into problems, often with the mortgage.”

In a nutshell, homes sales data has taken a beating lately. Though the damage was supposedly negligible, homes sales since 2007 are not as “good” as originally reported, pointing to the fact that you need corroborating data from a variety of sources to declare that housing is “officially” on the rebound.

New Household formation by those who are 20 to 25 years of age, began a steep downward trend in 2007. If 2011 continues this slide, I believe it will point to the true problem with housing, the lack of better paying entry level positions for college graduates, who are not able to form new housholds and may still be living with parents. The “pent up demand” evident for this group will probably remain “pent up” for a while longer.

CNBC recently reported that Foreclosures took a big jump in August of 2011 as banks increased foreclosure activity in the wake of the “robo-siging” scandal, but the total number of foreclosures is lower than 2010 by about 11%.

We’re still looking at several years to repair our battered housing market. Locally the signs in your immediate area could be better or worse. Areas with strong employment, and a population base with better paying jobs, usually enjoy better rent rates, fewer vacancies and better home sales than the average. But many of those areas have suffered in the commercial sector, largely due to working through a glut of commercial developments near the end of the housing boom.

So, while it looks like the fog of foreclosures and delinquencies may be lifting a bit. The market is still unpredictable. Those who are making major business decisions involving housing development, new construction and multi-family should be more conservative when making cash flow projections. Vacancy rates will be higher than expected in some areas, lower in others. The key is in knowing the difference.

Individual buyers and sellers will also find that the challenges they face or the profits they enjoy are local and based on the market fundamentals in the specific area where the property is located. The trends in vacancy rates for rentals, and selling prices for owner occupants will give us a good idea where this market is going by the middle of 2012.

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