Daily Gains Letter

After You Read This, You’ll Ask, “What Housing Recovery?”

By for Daily Gains Letter |

Housing RecoveryA lot of housing market data has come out over the last week or so, and in typical fashion, we tend to overstate the positive and underestimate everything else. However, by looking at the data collectively, it becomes apparent that the U.S. housing market recovery isn’t as robust as it seems. On top of that, it turns out this so-called recovery isn’t the economic savior everyone has been hoping for; in fact, it only has a modest impact on the nation’s overall economic recovery.

According to Realtor.com, housing inventories are rising faster than usual, despite the busiest spring and summer selling season in four years. The total number of existing homes for sale in June increased 4.26% month-over-month to 1.93 million, representing the sixth consecutive month of inventory growth. (Source: “June 2013 Real Estate Data,” Realtor.com, July 17, 2013.)

On July 17, the U.S. Department of Housing and Urban Development said June building permits were down 7.5% month-over-month at 911,000, while privately owned housing starts were 9.9% off May’s estimate at 836,000. These numbers show that the U.S. housing market recovery is in serious jeopardy. (Source: “New Residential Construction in June 2013,” U.S. Census Bureau, July 17, 2013.)

It was also announced that first-time home buyers in June accounted for just 29% of all existing sales in the U.S. housing market, translating into a little more than nine percent year-over-year. In a healthy housing market, first-time home buyers should account for 40% of all existing-home sales. (Source: “June Existing-Home Sales Slip but Prices Continue to Roll at Double-Digit Rates,” Realtor.org, July 22, 2013.)

The S&P/Case-Shiller Index shows U.S. housing market prices are up 13% since the beginning of May; however, housing prices are still 26% below their 2006 highs. While rising prices may make U.S. home owners “richer,” it’s only on paper, which won’t spur consumer spending and a broader economic recovery.

For those Americans who have their retirement fund tied up in the housing market, there is a long way to go before their heads are above water—especially if the U.S. is hoping a sustained housing rebound is going to save the economy.

While the U.S housing market recovery certainly contributes to GDP growth, it doesn’t count for as much as most think it does.

The U.S. Commerce Department said first-quarter GDP grew an anemic 1.8% over the fourth quarter of 2012; the previous GDP forecast predicted first-quarter 2013 growth of 2.4%. If a rebound in the U.S. housing market was going to have a substantial impact on the economy, some economists think it would have to lift GDP growth into the three-percent or four-percent range—we’re nowhere near that. (Source: “National Income and Product Accounts Gross Domestic Product, 1st quarter 2013 [third estimate]; Corporate Profits, 1st quarter 2013 [revised estimate],” United States Bureau of Economic Analysis, June 26, 2013.)

For the U.S. housing market to be healthy, we need a total reversal of these numbers. That’s not going to happen with interest rates on the rise. In May, the interest rate was just 3.35%, marginally above the record low of 3.31%. For the week ended July 19, the average fixed rate for a typical 30-year mortgage was 4.58%. Interestingly, mortgage applications are on the decline.

What do all of these statistics mean for investors? These statistics suggest that overall, homebuilder stocks may not be the best place for investors right now. For those who are already invested in homebuilder stocks, it might be a good idea to adjust your portfolio allocation and limit your exposure to the sector that really isn’t all it’s cracked up to be.

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