A BREAK IN THE HOUSING MARKET OR HAVE WE SEEN A BOTTOM? 7/18/2008

Second quarter figures are in on the housing market and suggest that we may well have seen the bottom of the market.  At the very least, we’re enjoying a welcome break in the seemingly endless bad news cycle the housing and credit markets have seen for the better part of the last two years.

June housing starts were up 6.1%, pending home sales remained constant for the 6^th straight month, the Case-Schiller index showed an April decrease of just 1.4%, and the median price of an existing home rose by almost $7,000 over that of April 2008.  Those are important steps in what will certainly be a long road to recovery for the housing market.  Though there is still significant excess inventory to be absorbed (approximated at 14 months) and the barriers to credit have yet to ease, it does appear that the worst of the housing crisis may be behind us, and we may well see increases in property values within the next 12 months.  What is unclear is what affect the outcome the presidential election will have on these sensitive markets.  If the incoming administration is too quick to raise taxes, or puts too much pressure on the Federal Reserve to raise rates in an effort to curb inflationary pressures, it could forestall the housing recovery for many months. 

Those buyers that are fueling the early demand increases are looking for a different type of home purchase than buyers just two years ago.  There are still bargains hunters looking for severely distressed sellers and scouring the foreclosure markets, but in contrast to the market those buyers met with 6 and 8 months ago, today their target properties are receiving multiple offers and driving the prices up above what may have been expected.  Newer buyers in the market are looking for smaller, better quality, more energy efficient homes and are more inclined to be looking for a neighborhood than the isolation offered by the McMansion’s sought by many homebuyers as market values skyrocketed.  While this may not yet be the case in all markets, it is clearly the case in some of those that had been hardest hit and may represent a prudent response to the wake-up call offered as the housing bubble burst at the same time that the cost of energy began its worrisome increase. 

This ‘early demand’ signal is an important indicator of a market bottom.  Those markets that avoided the declines seen in many parts of country may also see a lag in a potential recovery, but should benefit from a market bottom none-the-less.  In the mean time, buyers have migrated to areas where housing remained ‘affordable’, perhaps relocating to other cities and towns, still close enough to commute to work, or simply accepting less expensive neighborhoods than they may have considered before.  This has helped keep those areas or market segments from experiencing meaningful declines and has distributed higher income families to areas more traditionally populated by those with lower or fixed incomes.  The result may well be a gentrification of some of these areas or at the very least providing for greater diversity among homeowners in those areas.  Some areas that had become popular for home rentals have seen families move in, purchase lower priced homes, and begin the process of improving the home and thereby the neighborhood.

It’s hard to foresee the benefits of a market in decline until afterwards.  Just as a dying tree may provide an excellent environment in which seedlings will grow, so can a difficult market offer the opportunity for renewal and recovery.

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