The Housing Market – Signs of a Bottom

Most housing headlines have been extremely negative for quite some time. Everyone knows the US housing market has been in a bad recession for going on two years now. We are starting to see many signs of a bottom in housing activity both nationwide and in the Minneapolis market. It is now the typically strong spring selling season in the housing market. It has finally gotten sunny and warmer in Minnesota, which brings buyers out this time of year to look at homes. Mortgage interest rates are down almost a percent from last summer. Housing prices have fallen somewhat over the past year making homes more affordable. The federal government’s rebate checks are just now starting to arrive in people’s mailboxes. These are some of the positives regarding the outlook for housing and the economy.

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On a national level there are many positive signs that housing activity has bottomed. Homebuilding stocks, which typically lead the actual fundamentals by 6 months, have started to outperform the overall stock market over the past several months. The number of pending home re-sales under contract has been roughly flat since last August (it is no longer falling). Housing affordability on a national basis has improved significantly over the past 6 months thanks to falling home prices, lower interest rates, and slightly higher personal income. The National Association of Realtors Homebuyer Affordability Index is up about 40% from its lows in 2005. Home refinancing is up significantly over the past 6 months, back to the highest levels since 2004. The inventory of homes on the market (new and existing) peaked last summer and has fallen somewhat since then. The homeowners survey of “is it a good time to buy a house?” has jumped up in the past several months. With the increase in FHA loan limits from $271,050 to $365,000, it has been estimated that an additional 25% of homes on the market are now candidates for FHA financing. The most overinflated and overbuilt markets such as Florida, California, Phoenix and Las Vegas will probably lag the rest of the country in recovering by a year luxury homes in miami.

How is the Twin Cities housing market spring selling season going? Surprisingly well actually. Edina Realty reports that appointments and open house activity was up significantly in March. Edina Realty’s web activity had a 20% increase in visits (25% increase in unique visitors) this year over the first quarter of last year. “Activity is definitely heating up in this spring market, particularly among first-time homebuyers and buyers at the lower end of the market,” said Bob Peltier president of Edina Realty.

Other top realtors in the Twin Cities area also seeing some positive signs of a bottom in housing activity, especially at the lower end of the market. Brace Helgeson of Coldwell Banker says “the first time buyer market in the southwest suburbs, homes below $400,000, is actually very strong right now. Those buyers don’t have anything they have to sell first. We are getting multiple offers on homes in the $250,000-$350,000 price range”. David Friedrichsen of Shell Rock Realty sees more banks willing to fund home purchases, and a shift in homebuyer sentiment. “Interest rates are down and home prices have come down enough that there are more buyers in the market looking. Talk has now shifted from very negative to now thinking that it is a good time to buy a home”. Colleen Larson of Remax Results agrees, saying that “buyer confidence is up. Activity has been much improved, especially in the last month. Business in the lower end market has been strongest, but it is now getting slightly better at the high end as well.” They have recently sold 2 homes in the over $1 million price range in a week or less. Julie Trones, a top 1% producer for Remax Results has “seen a surge in energy in the market recently”. She recently sold a house in the $600,000+ price range in 6 days and had three other buyers come forward on that same house one day too late.

It is difficult to call the actual bottom in an asset class, especially one that has recently been in a bubble like the US housing market. Home prices may continue to fall this year and perhaps even next year. The psychology towards the economy and the housing market has been very negative. I am not forecasting an upturn this year in housing, just stabilization at the current low levels. If we can just get stabilization in housing in the second half of this year, that would be a nice positive for the US economy and likely positive for the overall stock market.

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