8 signs of a real-estate rebound
Confused about whether the housing market is coming back? Look for these 8 indicators to determine whether there's good news ahead.
Is the housing market on the verge of recovering? Is it recovering already? If you're not sure whether you believe the economists and pundits who think they can see the future, here are some tools that will help you make up your own mind.
1. Pending home sales
According to the National Association of Realtors, pending home sales, or the number of homes that are under contract and in the process of selling, rose by 8.2% in February (the most recent month for which data are available). The index is also an encouraging 17.3% over what it was a year ago.
Pending home sales are considered a leading indicator, meaning that they can forecast the direction in which the economy is headed. Leading indicators cannot truly predict the future, though, so they should be taken with a grain of salt.
The increase in pending home sales could be less indicative of a genuine improvement in the housing market, however, and more indicative of the pending expiration of the homebuyer tax credit, which requires homes to be under contract by April 30.
2. Housing starts
Housing starts are an important leading indicator of not just the housing market, but the economy as a whole, because people are more likely to start residential construction projects when things are looking good. Housing starts don't look promising right –now; the U.S. Census Bureau reported that privately owned housing starts in February were 5.9% below January and 0.2% above February 2009.
3. New and existing-home sales
New home sales reached a record low of 308,000 in February, according to the National Association of Home Builders. In 2005, 1.28 million new homes were sold per month on average. The good news is that new home sales increased by 20.8% in the West, one of the regions hardest hit by the housing crisis.
More good news comes from statistics on existing-home sales. About 5 million existing homes were sold in February, up from about 4.7 million a year ago.
4. Home inventory
Home inventory is another leading economic indicator. A greater supply of homes for sale indicates weak market conditions. The NAHB reported that as of February, 236,000 new homes were on the market, a 9.2-month supply and the worst number since May 2009. There was also an 8.6-month supply of existing homes on the market, the worst number since August 2009. However, these numbers are better than those from a year ago, when the supply was 11.1 months for new homes and 9.7 months for existing homes.
5. Housing affordability
The National Association of Realtors reports that in February, the median price of an existing home in the United States was $164,300 and the average mortgage rate was 4.99%. With median family income at $60,498, a family's housing payment would be only 14.2% of its income, well below the 25% cap that many financial experts recommend for keeping the monthly budget under control.
Compare these figures to 2007 averages, when a house cost $217,900, mortgage rates were 6.52% and median incomes were about the same at $61,173. While falling home prices aren't good, improved home affordability could help the recovery by putting homeownership within reach for more families, especially the first-time buyers who have historically helped end housing slumps.
However, credit is still difficult to obtain, and unlike investors, most families can't buy homes without a mortgage. What's more, despite how far prices have fallen, plenty of people in high-cost-of-living cities still can't afford to buy anything.
6. Mortgage applications
The Mortgage Bankers Association’s Weekly Mortgage Applications Survey reports on the number of people applying to borrow money to buy a house. For the week ending April 9, mortgage applications declined by 9.6% over the previous week. The four-week moving average, which is helpful in smoothing out the ups and downs of the weekly figures, was down 6.2%. The MBA stated that an increase in mortgage insurance premiums for Federal Housing Administration loans, which are attractive to buyers because of their low down-payment requirements, may have contributed to this decline.
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7. Mortgage interest rates
For the week ending April 9, the MBA reported that the average contract rate on a 30-year fixed-rate mortgage was 5.17%. Mortgage rates have been at historic lows for months, wavering between 5% and 6%. Low mortgage rates help entice buyers, but they can't fix a bad housing market on their own. The Consumer Confidence Index, a survey of how optimistic or pessimistic people feel about the economy, has been up and down in 2010, and consumers still feel pessimistic about the job market. The thousands of Americans who are unemployed couldn't get a mortgage even if rates were 1%.
8. Real-estate mutual funds
According to Morningstar, real-estate mutual funds returned 9.4% in the first quarter of 2010, one of the highest returns of any mutual fund category. Over the last year, they have also led all mutual funds, with a gain of 105.3%. Shares of Vanguard's REIT ETF (VNQ), which invests in a wide range of real-estate companies, gained 10% in the first quarter of 2010 and more than 69% in the last year. These returns show investor confidence in the overall real-estate market.
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Major indicators are giving mixed signals about how the housing market is doing. High unemployment rates, the continued difficulty of obtaining credit and the pending expiration of the homebuyer tax credit make it hard to tell where the housing market is headed. Keep an eye on these indicators and wait for clear and consistent signals to emerge before you consider the housing market to truly be recovering.
One of the issue with the tax credit is that it forced buyers into the market earlier than they would have wanted to be. That means that the next few months may be lean in numbers of first time buyers. That said, the lower median price and low mortgage rates should lead to rapid growth in the housing market once consumer confidence gets back up. I think the rebound is close in all areas of the country, but I think some will bounce higher than others.