5 Signals the Housing Market Will Improve

The media is speaking regularly about the U.S. economy pulling out of the recession despite a distressed housing market.  Can the American economy be improving without a healthy housing market? Given what a powerful force housing was in the economy before the bubble popped, it seems fair to assume it will continue to be significant.  What signs should you look for to determine if the housing market is going to improve?  According to Forbes magazine, here are five key factors to watch in anticipation of an eventual housing recovery.

1. Job Growth
The unemployment rate is the most significant statistic regarding the health of any economy. It doesn’t matter how many bailouts or stimulus checks are given out, or how many loans are modified. If there is no income, then foreclosures increase and sales decrease.  When unemployment goes up, housing prices typically stagnate as people are unwilling or unable to take out mortgage loans, and people typically are not eager to move into areas with no jobs. Therefore, in order for the housing market to improve, the job market must improve.  Efforts to focus stimulus in any other spot is foolish.

2. Inventories
Supply and demand still play a factor, even in this heavily government influenced market.  Simply put, the more months of supply of houses available, the lower the demand, and thus, the lower the price.  With lower prices and lower values, the higher the probability of people walking away from their homes, creating even more inventory. This increase in inventory means less opportunity for construction and less people working.  Therefore, investors need to keep an eye on housing inventory and hope for signs of improvement.

Generally speaking, “six” is the magic number in housing inventory. When housing inventories are at less than six months’ supply, prices usually rise. When inventories are above six months, prices typically fall.  According to Forbes, during the building of the housing bubble, inventories were often below four months’ supply. At the worst of the crash, that supply was just over 12 months. Multiple months below six will likely be necessary to start feeling some real optimism.

3. Prices and New Construction
Along with inventory, it is reasonable to keep an eye on housing prices and new construction activity. If both inventory and prices are declining, you might wonder if frustrated sellers are just taking whatever they can get and cutting their losses–a necessary part of the process, perhaps, but not really a sign of strength. Also, as mentioned above, there will need to be an increase in new home construction.  As the Forbes article states, ‘not only is construction a big marginal employer, but an absence of new construction will likely be interpreted as an indicator of weak future economic performance.’

4. Mortgage Loans
It is great that mortgage rates are at an all time low, but it does no good if no one is able to qualify.  Currently, according to a recent Money Magazine article, 25% of potential homeowners would be disqualified for a mortgage based on their credit score alone.  Given the number of those with jobs less than two years, having a high debt to income ratio, or other reasons, the market for qualified buyers has dwindled.  And many who can qualify have a house and are simply refinancing.  For instance, the June 25 mortgage loan application numbers looked good at 8.8% growth, but the purchasing gauge was down 3.3% (the weakest since 1997) as refinancing demand pushed up the overall number.  When banks start lending to the average person again, the housing industry should improve.

5. Look at Lumber
Forbes further states the following statistical trend:  If investors do not want to follow all of these sometimes-contradictory indicators, there may be a better way. Commodity lumber seems to be uncannily accurate in forecasting future housing performance, generally with a lag of about two to four months. In other words, if lumber prices start moving up, you can generally expect to see good news about the housing market in that two- to four-month window.

This is not altogether shocking. First, housing consumes about 88% of U.S. lumber demand (both new housing and remodeling/repair). Second, the commodity lumber market has historically not been liquid enough to attract speculation; the market is more in the control of those who actually produce and use lumber. Consequently, the signals from the lumber trading pit tend to be a little bit “cleaner” than you see in other commodities like gold or oil.

Summary
Giving gobs of stimulus money to the banks did not and will not fix this crisis.  Lowering mortgage rates will not do so either.  Job creation is the only way out of this mess. When people are employed, they can afford to keep their homes (reducing foreclosures and cheap inventory), buy new homes (reducing supply), and qualify for more mortgages (increasing purchasing).  But without income, the housing market will continue to struggle.