Housing Fundamentals Suggest Solid 2013 Recovery

Fannie Mae’s economists said on Thursday that, despite the feeble note on which 2012 ended, the economy has the building blocks, including housing, for strong growth.  Housing is now on a sustained growth path as are manufacturing and energy production but, given circumstances in Washington, Doug Duncan, Orawin T. Velz, and Brian Hughes-Cromwick said they see no reason to revise their forecast from January.  They said, however, that if their forecast is wrong it will be erring on the side of being too conservative.

Housing underpinned the broader economy in 2012, particularly the pickup in home construction. However home sales weakened and leading indicators such as pending home sales and building permits also pulled back, suggesting some softening momentum in the near term. Aside from the month-to-month volatility, all housing indicators performed quite well in 2012 compared with 2011, and housing fundamentals suggest a continuing solid housing recovery this year.

There was a general consensus that home prices bottomed earlier in the year and continued to build momentum, exhibiting robust year-over-year gains unseen since the housing boom, even during the traditionally weaker winter months.  The seasonally unadjusted CoreLogic house price index rose 0.4 percent in December from November, and 8.3 percent from last year-the biggest gain since May 2006. Home prices end year – p 5 (link below)

The dwindling inventory of homes available for sale, now at the lowest level since December 1994, is the main driver of rising prices.   Delays in the foreclosure process and strong investor demand have greatly reduced the inventory of distressed properties and the sales share of these properties dropped to 24 percent of existing homes sales at the end of 2012 from 32 percent a year earlier.  A shift toward short sales also has helped boost home prices.

Positive home price expectations are a crucial factor for a continued broadening housing recovery. The Fannie Mae January National Housing Survey showed consumer expectations for home price increases hovering near the strongest levels recorded in the survey’s two-and-a-half-year history. Such expectations provide an incentive for potential homebuyers to get into the market especially as many also expect interest rate increases.

Continued lean inventory and the increase in the rate of household formation as the labor market improves bode well for homebuilding activity and residential construction employment. The economists say they expect housing to be a bigger contributor to growth going forward. So far in the housing recovery, multifamily building has been a brighter spot than the single-family segment.

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