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A Housing Upturn Suggests Recovery Is Near


Price declines, low mortgage rates, and first-time buyer perks are sparking real estate gains—and the beginning of the end of the recession

That sweet music luring investors into the stock market these days is the sound of an economic recovery. Skeptics still think it's a siren song, inviting a shipwreck, but with each passing week evidence is mounting that the recession is finally ending. No one expects anything but a modest upturn, at least early on, but any growth at all will be a welcome turn after the past year's nosedive.

Perhaps the best sign yet that a recovery is near is the sharply improved housing data. After all, it was housing that toppled both Wall Street and Main Street, and stronger housing will play an integral role in rebuilding both. Home sales have clearly turned up in recent months, which is reducing inventories at a good clip and even slowing the rate of price declines. Plus, surveys show builders see market conditions improving enough to encourage new construction.

The housing recovery begins with demand, which both encourages new building and, with a lag, strengthens prices. Sales of existing homes hit bottom last November, and since then, they are up 7.7% through June. The low for new homes was in January, with June purchases up 16.7% since. Existing and new sales are still off 32% and a staggering 72%, respectively, from their 2005 peaks, but it's a start.

Even amid new restrictions on credit, demand is responding favorably to historically high affordability, including steep price declines, low mortgage rates, and a tax credit for first-time buyers. First-timers accounted for 29% of June resales, says the National Association of Realtors. The rise in mortgage rates in early June does not appear to have held back demand. Fixed mortgage rates, at 5.36% for a 30-year loan on July 24, are still historically low.

Distressed sales, including foreclosures and short sales, have been a major factor boosting demand for existing homes and helping to clear out inventories. However, in recent months the NAR says the share of these sales has been waning, even as overall buying has picked up significantly. This pattern suggests diminishing stocks of distressed properties and growing strength in traditional home buying.

Stronger demand has cut inventories notably. It would take 9.4 months to sell June's 3.8 million supply of existing homes, down from a high of 11.3 months about a year ago. Excluding condos and co-ops, the single-family supply is even lower. Recent trends in inventories and sales suggest the supply of existing homes will be about 7.5 months by yearend. That would still be above, but closer to, the normal supply of about 5 months.

The reduction in unsold new homes has been even sharper. Since 2006 builders have cut their supply in half, to 281,000 in June, which would take 8.8 months to sell. That's down from 12.4 months in January. Even modest sales gains in the second half would cut the supply close to the normal five months by yearend. Builders have slashed construction of single-family homes so much that the level of starts is far below comparable sales figures. That means inventories can fall, even as construction rises. Starts of single-family homes have jumped 32% since hitting bottom in February, the largest four-month gain in 18 years.

There are also signs that thinner inventories are exerting less downward pressure on prices. The Standard & Poor's Case-Shiller index, which is not adjusted for stronger spring pricing patterns, rose in May for the first time in almost three years. This gauge includes many homes with subprime and other nonconventional mortgages that are more likely to be sold at foreclosure prices. A price measure from the Federal Housing Finance Agency, which is seasonally adjusted and covers only homes with conventional mortgages, also rose in May and began to show signs of stabilizing earlier this year.

Amid high unemployment, a further expected rise in foreclosures, and little success from various loan modification programs, the road to a housing recovery will be a long one. But for the first time since 2005, the trends in sales, starts, inventories, and prices are all moving in the right direction.

Cooper is BusinessWeek's senior editor and senior economist and writes the influential Business Outlook column.

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