Will the Housing Market Recovery Continue?
We have all heard the recent news that the housing market recovery is well on its way off the bottom. With home prices continuing to move up, many are questioning the long-term strength of the housing market. While there is no question that home prices have hit the lowest point and won’t return to those levels again, many are worried that they missed the housing market recovery, as prices have already risen significantly. I think there’s a few more years left for price appreciation in the housing market.
It’s been another month, and there’s more news that home prices continue to move upward substantially. CoreLogic, Inc. (NYSE/CLGX), a research and analytics firm, reported that. in October 2012, home prices jumped up 6.3% nationwide, including distressed sales. This is the largest increase for home prices since June of 2006. Another sign that shows the strength of the housing market is that this is the eighth consecutive month of year-over-year nationwide increases in home prices. (Source: “CoreLogic Home Price Index Marks Eighth Consecutive Month of Year-Over-Year Gains,” CoreLogic, Inc., December 4, 2012.)
Not only was October a good month for the housing market—the eighth month in a row of strength in home prices—but also CoreLogic is indicating that, for November, home prices including distressed sales will be up by 7.1% year-over-year. Excluding distressed sales, the firm expects November home prices nationwide will jump 7.4%.
The president and CEO of CoreLogic, Anand Nallathambi, stated, “We are seeing an ongoing strengthening of the residential housing market. Reduced inventories and improving buyer demand are contributing to stability and growth in home prices which is essential to the long term health of the housing market and the broader economy.” (Source: “CoreLogic Home Price Index Marks Eighth Consecutive Month of Year-Over-Year Gains,” CoreLogic, Inc., December 4, 2012.)
Naturally, the 6.3% nationwide increase in home prices for October is a positive sign that the housing market is well on its way to recovery. Some markets are experiencing increases in home prices far in excess of the national average. Arizona, as an example, is up 21.3% year-over-year.
The most important part of an economic recovery is clearing bad debts. The problem with the Japanese economy was that the banks made and incurred so many bad debts during the ’80s that they never cleared them off their books, which hampered the nation’s economy for decades. The strength of the American financial system is the ability of our economy to clear bad debts and allow strong participants to be active in new economic formation.
While a large part of these buyers are investors, clearly, the entire housing market benefits from increased demand, which is resulting in higher home prices. With interest rates expected to be low until 2015, investors will continue to pour into the housing market until there are alternatives for their investing dollars.
Clearly, this means that the housing market won’t have much competition for investing dollars for several more years. Accordingly, the move up in home prices will continue until interest rates start rising substantially.
The easiest way to determine the future of home prices is an inverse curve with interest rates. When interest rates start declining, home prices start rising. Conversely, when interest rates start rising, home prices start declining. Until interest rates start rising substantially, the recovery in the housing market will continue unabated, and home prices will continue to rise by a considerable amount.