Has the U.S. Real Estate Market Finally Bottomed Out? Posted by AVCU on 4:19 PM

By Robert F. DeLucia, CFA 
Consulting Economist for MEMBERS Capital Advisors, Inc.

Summary and Major Conclusions:

• The depression in the housing market appears to be nearing an end, and a long-term bottoming process appears to be underway. A gradual but sustained recovery appears to be imminent, led by the multi-family rental market. 
• Home sales and new construction are already on a weak recovery path which should gather momentum during the 2013-15 period. Pending home sales have increased by 25% from the low of 2010, while a moderate reversal in construction is reflected in new housing starts and permits. 
• The key to the outlook for both new construction and house prices is the inventory of unsold homes. The official inventory has improved dramatically over the past several years and is near normal levels. The problem is the so-called shadow inventory of homes not yet listed for sale, which includes foreclosed properties. 
• Sales of distressed properties are accelerating, as foreclosures move more rapidly through the inventory pipeline. The key point is that these sales will comprise a large portion of total monthly sales in 2012, which will have the effect of exerting further downward pressure on overall market values. 
• Fundamental demand factors are mixed: Positive factors include record affordability, a rapid recovery in new household formations, and a continued increase in all-cash investor demand. Conversely, a depressed labor market, weak consumer confidence, and stringent underwriting standards by banks continue to act as powerful headwinds to housing demand. 
• Nationwide house prices have been declining at a 3-5% annual rate in recent quarters, a marked improvement versus the 20-25% declines in 2008. Current conditions are consistent with another 3-5% decline during all of 2012. House prices should begin to drift higher in 2013 and 2014, but at a moderate pace, and may not return to the previous all-time peak of 2006 until 2025. 
• Housing construction should trend moderately higher in future years, with housing starts reaching 750,000 and 900,000 in 2012 and 2013, respectively, up from 650,000 last year. Starts are not expected to return to the long-term equilibrium levels of 1.25 million until 2015 at the earliest. Following six consecutive years of subtraction, construction spending should make a small contribution to GDP growth in 2012. 
• The economic importance of housing far exceeds its small 2.5% share of GDP, and falls into the following categories: Employment, household balance sheets, banking sector finances, monetary policy, and small businesses. The overarching conclusion is that the U.S. economy is unlikely to transition to a healthy self-sustaining expansion until the housing market is restored to normal.

For more from Robert's full review of the housing market click here.