U.S. Housing: Are Better Days Ahead?

It would seem that the U.S. housing market - arguably the Achilles' heel of the global financial morass - is finally looking up.

Following the announcement on Monday that the inventory of unsold new houses in the U.S. had dropped from 10.2 months’ supply to a three-year low of 8.8 months’ supply, the S&P/Case-Shiller Home Price Indices yesterday showed an increase on a monthly basis in May for the first time since July 2006. Thirteen of the 20 metro areas reported positive returns, with the 20-City Composite rising by 0.5%. Although not yet in positive territory, the seasonally adjusted monthly figures nevertheless represent a significant improvement, with the 20-City down by only 0.2%.

Click to enlarge:

Source: Asha Bangalore, Northern Trust - Daily Global Commentary, July 28, 2009.

The 20-City Index declined by 17.1% compared with the same month last year. After 16 consecutive months of record annual declines, the indices have now shown four consecutive months of improvement in annual returns.

Confirmation of better tidings for the U.S. housing market also comes from the stock market in the form of a monthly graph of the Philadelphia Housing Index. Of particular interest is the RSI indicator (bottom section of chart below) - a momentum-type oscillator fluctuating between overbought levels above 70 and oversold levels below 30. The RSI line gave a sell signal at the peak of the housing boom in 2005, and has now turned up to its highest level in two years and breached a four-year downtrend. The chart would seem to indicate a bottoming of the Housing Index.

Click to enlarge:

Source: StockCharts.com

It seems that U.S. housing may finally have plumbed the depths of the crisis, but this does not necessarily spell a rapid turnaround. David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, summarized the situation as follows:

Stabilizing residential real estate prices are absolutely an essential ingredient in transitioning out of the recession, though inventories are still far too high to warrant a sustained upturn. Bottoming is one thing, booming is quite another.

Comments

[Mad Hedge F...:]

Not in this lifetime. A handful of positive data on residential real estate, and all of a sudden everyone is jubilant that the crisis is over. June new home sales popped by 11%, while the S&P Case Shiller Price Index flaunted two back to back monthly gains. Never mind that these are the same people that have been calling a bottom almost every day for the past two years, and who themselves have gone broke in the process. It’s a basic law of economics that when you drop the price, the volume goes up. We have not paid enough penance yet. We have not atoned for a generation of under saving and overconsumption. The harsh reality is that the torrent of selling is being briefly staunched by a dwindling group of first time buyers once priced out of the market, who saved their cash, and stayed away from the stock market, and are now buying two thirds off the top. Take away the fantastically generous government subsidies that expire in a few months, throw in the next wave of Option ARM reset induced foreclosures, and this market folds like a wet taco shell. I’m waiting to buy at 20th century prices, and make that a home with an indoor swimming pool and basketball court.

Jul 29 12:21 PM

[Robespierre:]

If the dot com bubble didn't come back after its demise why would the housing one? Is it different this time?

Jul 29 04:17 PM

[manya05:]

Careful with the Case-Schiller index, it is attached to some long and short levereged ETFs now (UMM and DMM), so the pressure is on now to manipulate the index. These two ETFs are behaving very strangely (to say the least).

Concerning the fundamentals of the real estate market, there are scores of people out there trying to sell and downsize and/or move, but are trapped (at least mentally) because they cannot cash-in all that retirement wealth they were expecting to get out of their homes. The inventory for sale is just the tip of the iceberg, there are millions of homes out there waiting to be unloaded when the time comes. Home prices will go nowhere for years, even decades, to come.

Jul 30 06:11 AM

[Michael Shu...:]

With all due respect, analysts who are unfamiliar with housing should not write about housing -- we are not close to a bottom. The key to home prices and values is supply, and that has three legs -- new homes, existing homes and the new leg, foreclosed homes. We are building half a million new homes a year -- halff of what used ot be called a "bottom" yet inventories are rising. Existing home sales perked up a bit - -and at the June rate of growth they will equal 2007 sales in 2020 -- more than one third of homeowners have listed or want to list their home for sales and that backlog is growing. Foreclosures have yet to peak -- they ar rising and will rise until 6-9 months after peak defaults, which in turn occurs 306 months after peak mortgage resets, and that occurs in July of 2011. This is all public information, by the way......

Jul 30 08:13 AM

[sickofthehype:]

How dare you write anything POSITIVE. Keep it NEGATIVE for the crowd! Please!

Jul 30 10:22 AM

[Lsente:]

This is why we are rallying so hard. This housing correction will become a secular trend measured in time frames that we have to adjust to. I understand all the weak fundamentals but can also lay credence to that fact that "investors" in homes have seen massive corrections and are surrounded by warm and cozy rates.

"Prices will continue to fluctuate"

Cheers and good trading to all

Jul 30 11:11 AM

[Lsente:]

Point of Clarification, reference was to the comment stream and article taken as a whole. "This is why we are rallying so HARD." I thought SA was turning a corner with regards to sentiment. Found it insightful to be proven otherwise.

Jul 30 11:21 AM

[Supersuperman:]

hard to believe that housing is turnaround. In fact the next wave of crashes on $1M plus housing is coming soon:

www.wealthalchemist.co.../

Jul 30 04:33 PM