December 21, 2012 at 08:20 AM EST
How Will the Housing Market Affect the U.S. Economy in 2013?

U.S. Economy in 2013One of the most important sectors of the economy is the housing market. The housing market is crucial for several reasons. First, the housing market employs a lot of people, both directly and indirectly. This includes the direct employment of people in the housing industry, such as tradesmen and homebuilders, and the indirect employment of people in related industries, such as the automakers that build pickup trucks to be used by tradesmen and homebuilders.

Another crucial factor is the direction of home prices. We’ve now seen continued strength in home prices, which is a positive for the homeowner. Considering a house is the largest property many citizens own, to see its value continually decline is mentally and emotionally difficult. However, with month after month of steady gains, this will help alleviate some concerns about the future.

According to the latest report from research and analytics firm CoreLogic, Inc. (NYSE/CLGX), in October 2012, home prices, including distressed sales, jumped up 6.3% nationwide. This is the largest increase for home prices since June 2006. This was not a one-time jump for the housing market, but the eighth consecutive month of year-over-year nationwide increases in home prices. (Source: “CoreLogic Home Price Index Marks Eighth Consecutive Month of Year-Over-Year Gains,” CoreLogic, Inc., December 4, 2012.)

In regards to homebuilder sentiment for the housing market, which is correlated with home prices, confidence continues to rise. According to the National Association of Home Builders (NAHB), confidence by homebuilders in December rose for the eighth consecutive month. This is the highest level of confidence by homebuilders since April of 2006. (Source: “Builder Confidence Continues Improving in December,” National Association of Home Builders, December 18, 2012.)

The chairman for the NAHB, Barry Ruttenberg, stated in the release, “Builders across the country are reporting some of the best sales conditions they’ve seen in more than five years, with more serious buyers coming forward, and a shrinking number of vacant and foreclosed properties on the market.”

Following these comments, it is no surprise that the Department of Commerce’s release of building permits and housing starts was strong. For November 2012, building permits were up 26.8% from November 2011, and housing starts in November 2012 were up 21.6% from November 2011. (Source: “New Residential Construction in November 2012,” U.S. Department of Commerce, December 19, 2012.)

The low inventory in the housing market is creating increased demand, which is seeing higher home prices and an increase in building permits to meet this demand. The National Association of Realtors (NAR) released data for November 2012 detailing that total existing home sales, which are completed transactions, were running at an annual rate of five million that month. This was much stronger than expectations of 4.8 million, and reflects an improvement of 14.5% from existing home sales in November 2011. The national median existing home price was $180,600 in November 2012, up 10.1% from November 2011. (Source: “November Existing Home Sales and Prices Maintain Uptrend,” National Association of Realtors, December 20, 2012.)

How does a rebound in the housing market affect the U.S. economy in 2013? For the last few years since the Great Recession, the combined decline in home prices and the crash in the housing market in general have been a headwind and a large negative for America’s economy. We are now seeing month after month of positive news regarding the housing market. If this were only one or two months, questions would remain about the sustainability of the rebound. Considering the extended length and duration of the increase in the housing market off the bottom, home prices should continue to see relatively stable gains.

Note that I do not believe we will regain the previous highs in terms of home prices anytime soon; however, I do believe stability and reasonable growth will be attained. This will help drive many industries directly and indirectly related to the housing market. As I mentioned previously, pickup truck sales will be a benefactor, as well as various inputs into the housing market.

The rebound in home prices and growth in the housing market are impacting commodity prices. If I asked which of the 24 commodities tracked by Standard & Poor’s GSCI Spot Index was the strongest in 2012, I doubt many people would say lumber. But lumber prices have gone up 37% this year! Lumber prices have doubled since January 2009, and are now at a six-year high. (Source: “Lumber Reaches 6-Year High as Housing Rebound Erodes U.S. Supply,” Bloomberg, December 17, 2012.)

Clearly, the housing market rebound is here to stay, as home prices will continue to increase for as long as interest rates remain low. The real question will be: once interest rates start rising, how will the housing market react? Historically, a rise in interest rates is met with a difficult housing market sector.

Home prices are based on income, interest rates, and supply. In the current environment, income is not growing, but interest rates continue to be at multi-decade lows while rents are rising; combined with a tight housing supply in many markets, this is making buying a house a value proposition.

It will be interesting to see what happens in a couple of years, when interest rates are rising and the supply-demand equation is more balanced. If incomes aren’t rising then, we could potentially see home prices, as well as the entire housing market, take a hit. Until that point, the housing market will remain strong and will have a positive impact on the U.S. economy.

The post How Will the Housing Market Affect the U.S. Economy in 2013? appeared first on Investment Contrarians.

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