Evidence Mounts: U.S. Real Estate Market Has Passed Bottom, Entered Recovery

Includes: IYR, XHB
by: Mark J. Perry

The Federal Housing Finance Agency (FHFA) released its monthly report Tuesday on U.S. home prices in May, based on its House Price Index (HPI) for houses financed or guaranteed by Fannie Mae or Freddie Mac. According to the FHFA, home prices increased in May by 0.8% from April to an index level of 188.06, which was the highest level for home prices since August 2010 (see top chart above). The April-May increase in the HPI was the fourth back-to-back monthly price increase starting in February, and was the largest four-month increase in home prices (3.47%) since the fall of 2005.
Over the last year, home prices have increased by 3.7% since May 2011, and that annual gain was the largest yearly increase in home prices since September 2006, almost six years ago (see bottom chart). It was also the first time of four consecutive annual increases since the summer of 2007.
In related housing news, leading real-estate information provider Zillow reported that its Home Value Index increased in the second quarter by 0.2% from last year, marking the first annual gain in its measure of home prices since 2007. Zilllow's chief economist Stan Humphries declared that the increase in home prices for the first time in almost five years means that the U.S. real estate market has finally reached a bottom and has now entered a new period of gradually increasing home values.
Bottom Line: The evidence continues to mount that we've passed the bottom of the U.S. housing market, as we continue to see sales gains for both new and existing homes, and gradual but ongoing increases in home prices according to various sources like the FHFA, Zillow, CoreLogic and the National Association of Realtors (median existing-home price in June was the highest since 2008). Moreover, home builder confidence reached a five-year high this month, and the S&P Homebuilders Index has gained 20% over the last year (compared to an overall flat stock market), which provides additional evidence of a real estate recovery. With record-low mortgage rates and pending sales at the highest level in two years, we can look for more improvements in the real estate market going forward through the rest of the year.