Housing Will Drive the Recovery

S&P Case-Shiller released data on nationwide home prices yesterday.

See if you can spot the trend:

Source: S&P Case-Shiller.

This is excellent news. Keep five things in mind:

1. Prices are rising because the supply of for-sale homes is so low. Part of that is driven by labor shortages in the construction industry. "They can't find enough people to work in housing, that's the only thing holding it back right now," hedge fund billionaire David Tepper said last week. Richard Dugas from Pulte (NYSE: PHM  ) mentioned late last year:

With new home demand having accelerated quickly and having remained strong throughout the year, the number of markets feeling some degree of labor pressure is growing. In fact, almost all of our markets have now reached a point where labor pressures are being experienced to some degree.

2. Housing construction is still well below average, and short of what is needed to keep up with population growth. Residential construction's share of GDP is still about half its long-term average. Until construction picks up considerably (and it will), prices will likely climb higher (but don't expect continual gains).

3. These gains are not pushing us anywhere close to a new housing bubble. Based on price-to-income, price-to-rent, homeownership rates, or any other valuation metric, nationwide home prices are still quite reasonable.

4. As prices rise, fewer Americans are underwater on their mortgages. According to CoreLogic, almost two million fewer homes have an underwater mortgage today compared with just a year ago. For an economy suffering under the weight of ravaged consumer balance sheets and dismal consumer confidence, this is the best news possible. It also spreads throughout industries. Housing's recovery was referred to 19 times in Home Depot's (NYSE: HD  ) conference call last week. The Wall Street Journal noted how it affects everything from Ford pickups to banks.

5. As one economist put it, "Housing IS the Business Cycle." Housing caused the recession, and it will be responsible for our recovery. 

For more, check out:

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Comments from our Foolish Readers

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  • Report this Comment On May 29, 2013, at 10:58 AM, XMFGortok wrote:

    "Housing is the Business Cycle" mistakes correlation for causation.

    Interest rates fuel the business cycle. Cheap money (or free money, in our case) encourages investment. Some of those investments pan out, some don't.

    It's easy to take risks when you do it with someone else's money and there's a 'safety net'.

    The problem with putting interest rates below what the market expects is that people lose their minds. They equate money to wealth, and start investing in things that are probably not sound business ideas (.com bust, housing as a piggy bank), and then when everyone finally realizes their investments were fueled by a credit frenzy and not by sound business principles, the market crashes.

    Is the economist's contention really that the recovering housing market has absolutely nothing to do with the Fed buying billions in Mortgage backed securities every month?

    Or that it has nothing to do with the ultra-low interest rates that are set by the Federal Reserve at this moment?

    The quote would have been more accurate if they had said, "The Federal Reserve has caused the boom/bust cycle over the last 100 years."

  • Report this Comment On May 30, 2013, at 10:26 AM, MattBurns25 wrote:

    Agree with you that: Housing Will Drive the Recovery

    The economy is recovering steadily, as indicated by the rising Real Estate index, see article on the

    I Know First system site,

    published on December, 27.

  • Report this Comment On May 30, 2013, at 10:54 AM, XTMFCaptain wrote:


    Love your work, but I disagree with this post. While housing is an enormous part of the economy, the chart above should be tied to interest rates or the slowdown of REO properties/short sales coming to market. Rates have driven the recent uptick and could very well kill it if rates rise. Also, the supply is low due to banks slowing down on bring delinquent or underwater properties to the market. Adding to this is institutional investors buying rentals in bulk for the first time ever. How this plays out will dictate future prices. I imagine they are hoping to pump and dump.

    Housing probably won't implode like it did, but it is far from a bull market that will add lots to GDP.

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