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3 Major Positive Signs for the Housing Market

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As we all probably remember in vivid detail, the housing market was the instigator of a crisis that spiraled out of control, and whose lingering effects have held back the U.S. economy for years.

But housing now finally appears to be helping the economy, rather than slowing it down. And a few major indicators suggest it may have finally turned the corner.

Positive indicators
According to a report from the U.S. Commerce Department, new-home construction this year is likely to contribute to economic expansion for the first time in seven years. In the first and second quarters, residential construction added 0.4% and 0.2%, respectively, to U.S. GDP.

Year-over-year nationwide home prices and sales of new homes have risen meaningfully, while inventories have declined markedly. Supply is finally starting to come in line with demand.

According to CoreLogic, a leading provider of housing information and analytics, nationwide home prices rose 4.6% year over year in August, representing the largest annual gain in six years. And inventory of for-sale homes is currently at a 5.9-month supply, the lowest since March 2006. Not bad given that a six-month supply is usually considered a healthy inventory level.

Optimism regarding the housing market is on the rise as well. According to a recent survey by Fannie Mae, Americans are displaying improved confidence in the housing market and expect home prices to continue rising over the next year.

A big year for housing-related stocks
This positive momentum in the housing market is nowhere more evident than in homebuilding stocks. The sector has been on a tear this year, with the Standard & Poor's Supercomposite Home Builders index up nearly 90% year to date. Standard Pacific Corp (NYSE: SPF  ) , KB Home, and PulteGroup are all up well over 100% so far this year.

The optimism surrounding the housing market has even spilled over into home improvement companies, with Home Depot and Lowe's (NYSE: LOW  ) up nearly 50% and 30% year to date, respectively. At any rate, all five of these companies easily trounce the performance of the Dow Jones Industrial Average, which has risen less than 8% this year.

Even the big banks have reported solid profits on the back of their mortgage businesses. For instance, US Bancorp (NYSE: USB  ) saw its mortgage banking revenue more than double to $519 billion in the third quarter, representing the fourth consecutive quarter that the bank's mortgage banking revenue has risen.

Similarly, Wells Fargo and JPMorgan posted record quarterly profits driven by their mortgage businesses in the most recent quarter. Even Bank of America (NYSE: BAC  ) , still reeling from billions in real-estate losses after its ill-fated acquisition of mortgage lender Countrywide Financial, reported a substantial rise in mortgage banking income in the third quarter.

Can the momentum continue?
But the question on everyone's mind is whether or not home price gains can continue into the second half of the year. Home prices often rise in the first half of the year, only to flatten out or decline in the second half. Over the past several years, this has often turned out to be the case, with prices declining in the latter half partly due to a flood of cheap foreclosed properties entering the market, as well as fewer homeowners willing to sell.

But there are signs that this may not be the case this time around.

For one, rising home prices have drastically reduced the number of underwater borrowers -- those who owe more than their home is worth. And two, foreclosures are on the decline. In recent years, a flood of foreclosed properties coming onto the market in the second half of the year offset any meaningful price increases in the first half.

According to CoreLogic, a leading provider of housing market information, roughly 600,000 underwater borrowers regained equity in their homes in the second quarter this year. As of the end of June, the percentage of homeowners with negative equity fell by 1.4% to 22.3%, as compared to 23.7% as of the end of the first quarter. Rising home equity is a crucial development since equity makes up the biggest component of a homeowner's wealth.

And for the month of August, CoreLogic recently reported 57,000 completed foreclosures, down from 75,000 in the year-earlier period. That represents the fourth consecutive month of falling completed foreclosures, according to the company's chief economist Mark Fleming.

So has housing turned the corner?
Despite this string of positive indicators, significant headwinds remain. Some of the graver concerns include a lack of mortgage credit availability for a large portion of would-be homeowners, uncertain employment prospects for millions of Americans, and a level of median household income that has barely budged in more than 15 years, after being adjusted for inflation.

There are also several uncertainties that are likely to limit the upside in the housing market until they are favorably resolved. The future of Fannie Mae and Freddie Mac, government-sponsored enterprises that, along with the Federal Housing Administration (FHA), back more than 90% of all new mortgage originations, is probably the biggest. Another is the impact of Basel III regulations on banks that originate mortgages, like Wells Fargo, JPMorgan, US Bancorp, and Bank of America.

Clearly, the improving housing market has been beneficial to these banks, who are raking in record profits from home loans. To learn more about the most talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.

Fool contributor Arjun Sreekumar has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America. Motley Fool newsletter services recommend Lowe's Companies. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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