The Truth Behind the Housing Market
By Sasha Cekerevac for Investment Contrarians |
With yet another month of data, we’re seeing the continued recovery in the housing market. Research firm CoreLogic, Inc. (NYSE/CLGX) just reported that August home prices were up 4.6% from a year ago. This big increase in year-over-year home prices is the largest in six years.
Don’t get me wrong; the housing market will not reach the highs of the past decade anytime soon. But we are clearly off the bottom and that is a crucial development. To buy such a large asset, buyers need to feel somewhat secure that home prices won’t keep dropping. While no one is looking for massive returns, having a stable housing market is extremely important in this economic recovery.
While many believe the housing market is flooded with properties, the opposite is true; we’re seeing shortages of properties driving up home prices, not only in this report, but from the homebuilders themselves. That’s why homebuilder stocks have had massive moves this year, being one of the strongest equities to own.
According to the National Association of Realtors, the number of listed homes for sale was down 18.0%. I think this is partially due to the fact that the homeowners are seeing home prices increase; so they hold off until home prices get high enough for them to sell their properties. At that point, the housing market will reach some sort of equilibrium between supply and demand. For now, demand is clearly outpacing supply in many parts of the country.
When we add what the Federal Reserve just announced—keeping rates low for some time—they’ve certainly helped the housing market. Now that potential buyers are seeing home prices moving up with cheap financing, they’re jumping onboard. Some of the new homebuilders are seeing extremely strong demand in certain parts of the housing market.
According to CoreLogic, 80 cities out of the 100 that it tracks had homes prices increase for the past 12 months, ending in August. In cities where the supply is extremely low, the home prices have gone up extremely fast, such as Arizona’s 18.2% increase from last year.
But don’t get caught up thinking that last decade’s highs in home prices will be reached shortly. We will see millions of more homes put up for sale as home prices continue to steadily move up. But that is exactly what we need in a good and healthy housing market: liquidity and ease of transactions. This bodes well for the economic recovery over the next few years.