Housing Problems Are Dissipating and Fragmenting: Time to Think About Buying?

 |  Includes: IYR, PSR
by: John Tobey, CFA

I just saw an article saying the stock market’s run-up is ignoring housing’s problems. That supposition is wrong on many counts.
First … Yes, there are times when the stock market’s focus is myopic and misses blossoming risks. Housing today hardly qualifies as one of those. In fact, there has been so much angst that housing’s good news is what’s being ignored.
Second … The economy continues to improve, and that means the support for a good housing market is building. (See my recent article about the economy’s strong indicator performance: “These Three Economic Gauges Read ‘OK’”.)
Third … The health and value of real estate remains rooted in location. Housing in the US is highly fragmented. Price run-ups and the use of subprime lending varied widely by geography. The multiple-foreclosure stories come from specific communities, such as Cleveland, Las Vegas and California developments in distant suburbs.
Fourth … Housing is unique because it is both a consumer purchase and an investment. In my previous article, I made this special mention on housing:

Housing deserves special mention because it combines both economic conditions (e.g., consumer income and interest rates) with investment measures (e.g., equity growth and optimism). Because we had a sizable bout of house investing fever, we are going through a shakeout, exacerbated by the economy’s weakness. This is similar to the shakeout in the US stock market following the internet stock investment craze ten years ago. Expect housing in overbuilt areas to recover slowly because excess inventory needs to be reduced. Likewise, in 2001-2003, the “overbuilt” internet industry had to be cleared out before that part of the US stock market could begin to recover in earnest. IMPORTANT: Do not apply these thoughts to everything labeled “housing.” Just like the US stock market, where areas that were excluded from the internet bubble performed well, the non-overbuilt housing areas (and this is almost everywhere) should improve nicely as the economic conditions continue to recover.

Fifth … Housing’s conditions actually look positive for this year. (I wrote why in “A Robust Housing Market – 2010’s Biggest Surprise?”)
So … As the economy continues to improve, expect housing’s problems to continue dissipating. Also, the national view of housing will continue to fragment into local markets, and we could see a very good housing market this year.
Disclosure: No positions