More Bullish Signs for Housing

| About: SPDR Homebuilders (XHB)

As the U.S. recovery churns into its second year, more bullish arguments for housing are beginning to emerge.

Talk and writings about real estate has finally shifted lately. It looks as if our contrarian view of the housing market is finally beginning to gain traction.

For instance, Credit Suisse (NYSE:CS) analysts say the worst is behind us and that fear of another hit on the housing market is just an overreaction. The bank experts point to U.S. government support of 70% of home mortgages that will likely keep prices from the drops seen in 2007 and 2008. Last week Brett Arends of the Wall Street Journal listed 10 reasons to buy a home. He strongly counters the recent Time Magazine cover story that questions the pros of homeownership. But perhaps the strongest voice comes from Bill Wheaton of Massachusetts Institute of Technology's Center for Real Estate. Wheaton believes the housing market is poised to make a strong comeback. His research points to "a sleeping giant that is about to wake up."

Wheaton modelling shows that much of the excess home inventory will either be sold, occupied or otherwise absorbed by 2013. Furthermore from 2011 onward, buying demand will return to pre-recession levels. Even more encouraging is that he shows that the recovery of home construction could boost overall GDP to levels unseen during recoveries after other previous recessions -- the the exception being that of the massive building that happened right after World War II.

His paper illustrates that, "housing construction will not only rise, but it will stay high for a while, which didn't happen in previous recoveries." Wheaton continues, "It won't just be a one or two year blip."

The heart of the Wheaton argument lies in the rate of residential construction today. It's been historically low – so low that demand is now actually significantly overtaking the level of building going on. This demand-side factor alone sets the stage for a relatively large comeback in residential rebound.

As we've noted here on several occasions, housing drew us into the large slump and it is likely that housing will provide significant bounce to lead us out on the positive side.

Housing construction could hugely drive America's economic growth over the next few years, Wheaton says. Residential investment as a share of GDP is relatively small, averaging about 3% to 4%. But given that there's so little building going on today, it's plausible housing construction could add an average of 0.7% to GDP growth per year over five years – a level far greater than what has been seen during recoveries of previous downturns.

Of course many see Wheaton (and others listed above) as way too bullish given what the majority of "experts" are saying about the housing rut.

But remember when it comes to economics, the majority is always wrong.

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