Housing market showing signs of turnaround

[Editor's note: This story was updated and changed Feb. 24 because some of the quoted material in the original was wrongly attributed to employees not in a position to speak for their company.]

The real estate market is picking up in 2012.

That may not sound like much: 2011 was so dismal – the worst year for sales of new single-family homes since at least 1963 and for total construction spending since 1999 – that this year has to be better, almost by default. But 2012 is shaping up to be more important than that: It could mark the bottom of a five-year housing downturn.

The implications of such a turnaround are huge. It would mean that (1) the pool of "underwater" homeowners – who owe more on their homes than they're worth – would stop growing, (2) home builders could start hiring again, and (3) residential real estate, a key sector of the economy, would cease dragging down growth. Some analysts say the turnaround is already under way.

"It really is a good time to buy real estate," says Jay Hummer, executive vice president of  RE/MAX of New England, based in Natick, Mass. "Years from now, people are going to look back and say: 'I wish I had bought real estate' " in 2012.

The market still has challenges. After doubling between 2000 and 2006, housing prices have fallen by a third and continue downward, according to the S&P/Case-Shiller indexes of home prices. A flood of foreclosures, while not quite as high as in 2010, will outdo last year's level and throw thousands more Americans out of their homes. Nevertheless, these negative trends are slowly clearing out the backlog of unsold homes that have hung over the real estate market like a dead weight. The most obvious area of recovery is existing homes.

Sales of existing homes rose in January, the third rise in the past four months, and now stand 0.7 percent above the spike in January 2011, the National Association of Realtors (NAR) reported Wednesday. The total inventory of homes has fallen more than 40 percent from its peak and now stands at its lowest level since 2005. 

"It is clear that a housing recovery is now well underway," Capital Economics, an economic research firm based in Toronto, concluded in a written analysis last month.

Sales of new homes slipped in January, the Commerce Department reported Friday, but upward revisions in previous months suggest a slightly rising trend. Also, the number of unsold new homes under construction fell to a low not seen since the US Census Bureau began tracking them in 1963. The number of completed new homes for sale was the lowest since 1971.

"The housing market continues to improve," wrote Brian Wesbury, chief economist at First Trust Advisors L.P., a financial services firm based in Wheaton, Ill., in an analysis Friday. Home builders seem to be anticipating an increase as well, he noted in his analysis, as the number of building permits continues to increase gradually.

The area where there's little sign of improvement yet is home prices, which continue to fall. In January, they were down 2 percent from a year earlier, the NAR reported. But several economists expect them to stabilize later this year. "House Price Bottom in Sight" was the title of a Goldman Sachs economic analysis of the market in December. 

In some metro areas, the recovery is already under way, says Mr. Hummer, using a RE/MAX compilation of January data not yet incorporated into the NAR report. Median sales prices of homes in the Phoenix metro area have jumped 9 percent in the past year, he points out. Orlando, Fla., is up 15.8 percent during the same period; Miami, a whopping 23.8 percent. 

A big question mark is the direction of interest rates. One reason that home sales have rebounded is extremely low mortgage rates, which have not been seen for more than 50 years. But the Federal Reserve program to push down mortgage rates ends at the end of June and economists are divided over whether the Fed will inaugurate another round of purchases of mortgage-backed securities to keep rates low.

The direction of the economy is also crucial. The last two months of employment data has been surprisingly buoyant, suggesting that the economy has some momentum. Some economists expect growth to slow, partly because of a slowdown in Europe and some emerging markets. Not everyone agrees that a slowdown there will spoil the US recovery or the positive signs in housing.

It will take time, given tight credit and cheaper prices for existing homes, but "sometime over the next several years, sales will rise to an annual pace of about 950,000," wrote Mr. Wesbury. That would be nearly three times the current level and signal a return to good times for home builders.