There are yet more signs that the crippled U.S. housing sector is getting back on its feet. On Nov. 23 news arrived that U.S. existing home sales jumped 10.1% in October. Homes were bought and sold at the rate of 6.1 million per year—much better than the 4.5 million rate in the beginning of the year. More data are expected in coming days on home prices and new-home sales. "We've seen some more encouraging data [on] the housing picture, but we're not out of the woods," says Michael Sheldon, chief market strategist at RDM Financial Group. The challenges remaining for residential real estate include the many foreclosed homes moving onto the market, a large inventory of unsold homes, questions surrounding the federal government's efforts to stimulate housing sales, and broader economic weakness that saps Americans' ability to buy. So what signals could demonstrate that the housing market has real strength? BusinessWeek asked economists and housing experts which indicators they're watching closely. Housing Inventory As with any market, the balance of supply and demand matters in real estate. And that balance is still out of whack, but it is improving. In October the equivalent of seven months' supply of existing homes were on the market, down from eight months in September. "We're showing signs that we're clearing out the excess inventory," says Michael Strauss, chief economist at the Commonfund, but inventories are still high. A more normal level would be 5.5 to 6 months, he says. One good sign is that homebuilders seem to be adding very little supply, with new-home inventories at their lowest levels since 1982. "All the unsold stuff is starting to get liquidated," says Michele Gambera, chief economist at Ibbotson Associates, a subsidiary of Morningstar (MORN). "But there is still so much that has to be sold before the market has a semblance of normality." Home Prices Home prices remain depressed but may have hit bottom. The median sale price of an existing home in October was down 7.1% from a year ago, better than the 8% year-over-year decline in September. When the weather gets warmer in spring, home buyers come out of hibernation and housing prices often move higher. The spring of 2010 may be the market's best hope for a significant upswing in home values—the first in more than three years, says Michael Englund, chief economist at Action Economics. "If the story is out that we're seeing big increases in price, that will be an encouraging sign," Englund says. That, in turn, could give a big boost to the psychology of the housing market and to the mindset of Americans who have so much of their wealth tied up in their homes. "We need the housing market to stabilize because it is such an important component of household wealth," says Jerry Webman, chief economist at OppenheimerFunds. Hidden Supply Economists and real estate experts are grasping for any indication of how much "hidden supply" is out there waiting to come to market. First, there are home buyers who would like to sell but are waiting for better market conditions. Second, there are foreclosed homes in the process of being seized and sold by banks. Both are difficult to measure or predict. "There is all this shadow inventory building up," says Mike O'Rourke, chief market strategist at BTIG. "The banks are so overwhelmed, it takes forever to work it out." One positive sign: Banks already have been liquidating foreclosed homes throughout 2009, often at deep discounts. And despite the desperate deals made by these sellers, home prices have essentially moved sideways this year, Strauss notes. The median price in October was only $1,600 below its level in May. Government Policy Two federal policies seem to have provided a boost to the housing market this year: A tax credit provided incentives of up to $8,000 to new-home buyers, and the Federal Reserve has purchased mortgage securities in an effort to keep mortgage rates low. The tax credit has been extended until the spring of 2010. The future of the Fed's mortgage program is an open question. At some point both stimulus programs will need to end. The government "needs to demonstrate the economy is able to stand on its own two feet," Sheldon says. The good news is that the housing market probably has at least another six months to burn off inventory with government encouragement, says O'Rourke. "We want to continue to see this inventory worked off." Once the number of unsold homes stabilizes, the market can operate more normally. "Presumably at a certain time the housing market will have some momentum of its own," Englund says. When stimulus is withdrawn, "the goal is to have self-sustaining increases in the housing sector." The Broader Economy Problems in the housing market arguably caused the financial crisis and led to the recession. But a sustained improvement for housing might need to wait for the economy to recover on its own. The job picture, in particular, is crucial for residential real estate. "As long as people are employed, they are more likely to be current on their mortgage," Gambera says. Demand for housing is driven by demographics—the number of new households being created—and the jobs picture. Strauss notes that demographic trends are actually favorable. "But right now those are being more than offset by current economic conditions," he says. If you want to know how much your house will be worth in a year or two, you might be better off watching the labor market than the housing market. And because real estate conditions often vary greatly from region to region, the most crucial metric may be the local job picture.
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