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After Deep Slide, Housing Shows Signs Of Life

More signs like this are showing up, a signal that sales are beginning to improve.
Justin Sullivan
Getty Images
More signs like this are showing up, a signal that sales are beginning to improve.

For the first time in four years, there's good news in the housing market. Lately there have been indications of growth in home sales, land prices and construction spending.

But like the economy as a whole, the housing sector remains fragile.

"Definitely, last year was a bad year, but that was the bottom," says Celia Chen, a housing expert at Moody's Analytics, an economic research firm. "The fundamental drivers for housing are improving."

There are a number of reasons many people are ready to buy now. Homes are more affordable, with prices having come down, on average, about 30 percent from the peak of the market five years ago. And interest rates on 30-year loans are running below 5 percent, making a big difference in monthly payments.

"Everyone was out there worrying about falling house prices -- 'I don't want to buy,' " says David Crowe, chief economist for the National Association of Home Builders. "That worry seems to have dissipated. The converse now is, 'I don't want to wait until interest rates go up.' "

Don't Celebrate Yet

But it's too soon for Realtors to celebrate. Sales numbers were goosed in recent months by a temporary tax credit that has expired. And there still will be plenty of foreclosures in the months to come, which will drag down prices in many markets.

Last year was a bad year, but that was the bottom.

It's certainly good for the sector to be picking up, Chen says -- but almost anything looks like an improvement after the trough the market had sunk into.

"Our forecast for both home sales and construction has 2010 as the second-worst year on record," she says. "2009 was the worst."

April Wasn't The Cruelest Month

On Tuesday, the Commerce Department said that construction activity in April saw its biggest monthly gain in a decade. Residential construction was up 4.5 percent over March and by a slightly larger amount over April 2009. A day later, the National Association of Realtors announced that pending home sales rose 6 percent in April -- marking the third straight month of gains.

Judging a recovery by numbers from April would be a mistake, however. A first-time homebuyer tax credit, worth as much as $8,000, fueled a rush of sales as people sought to enter into contracts before the credit expired on April 30.

Once it did, mortgage applications dropped dramatically. And lenders are still quite picky about their customers. Nearly all the loans issued in the first quarter of this year were underwritten by government agencies such as Fannie Mae and Freddie Mac, says Mike Larson, a real estate analyst with Weiss Research, an investment firm in Florida. "There's very little private financing these days," he says, "very little risk-taking by the banks."

There's Still Surplus Inventory

There have been signs of hope among those professionally invested in the housing sector. The largest homebuilding companies, which had virtually shut down activity for three or four years, are starting to buy up land in a big way. Prices for finished lots -- land where infrastructure such as sewer and water lines are already in place -- have gone up by double-digit percentages from their lows early last year.

"Even in Las Vegas" -- perhaps the nation's weakest housing market -- "the person with the long view understands that that market will return," says Crowe, the NAHB economist. "At some point, they will need to add houses to the housing stock."

After years of decline everywhere, many markets are recovering. There are going to be more foreclosures in what Larson calls "the most bubblicious markets" in Arizona and Florida. But homebuying and prices are picking up in places like Dallas, Denver and even economically struggling Cleveland.

"As investors, when you're able to buy properties that rent for far more than the mortgage [costs], that tells you that people should be buying," says Kathy Fettke, a real estate investor in California.

Traditional Buyers, Welcome Home

Although there are bargain hunters out there, for the most part speculators have been driven from the marketplace, Larson says. "You can get real, traditional buyers again, using traditional financing. The housing crash has had one positive side effect ... it made housing affordable again. Housing had gotten out of reach if you weren't using this ridiculous financing."

That makes it a good time to buy for people just entering the housing market -- traditional new buyers in their 20s or 30s. But the question is, how many of them now have jobs that make it smart for them to sign up for decades of mortgage payments? The May employment report, which showed very small gains in private hiring, was not especially encouraging on that score.

Economists believe that rather than fueling the recovery, as was the case following the recession of 2002, housing will track the employment picture. A sharp uptick, then, is unlikely.

"I'm not expecting the housing market to come back to anything near normal until 2012," says Chen.

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