Why home builders have been perking up
http://www.marketwatch.com/story/why-home-builders-have-been-perking-up-2012-11-20?link=sfmw
Nov. 20, 2012, 3:34 p.m. EST
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By Ruth Mantell, MarketWatch
WASHINGTON (MarketWatch) — Sentiment, not to mention stock prices, of home builders are perking up, and they have good reason.
The inventory of existing homes is at a 10-year low, according to data
released Monday by the National Association of Realtors. At the current
sales rate, inventories represent a 5.4-month supply, the leanest supply
since 2006.
Read about existing-home sales
.
“Builders are reporting increasing demand for new homes as inventories
of foreclosed and distressed properties begin to shrink in markets
across the country,” said Barry Rutenberg, a Gainesville, Fla.-based
home builder and chairman of the National Association of Home Builders.
Read more about home builder confidence.
Building sentiment rose to a six-year high in November, while an exchange-traded fund of builders
ITB
+0.15%
has roughly doubled from a year ago.
Meanwhile, the rental vacancy rate, which measures the proportion of the
rental inventory that is vacant for rent, fell to 8.6% in the third
quarter from more than 11% three years earlier, around the end of the
Great Recession. In fact, recent rates are the lowest since 2002.
Homeowner vacancy rates are also down from recession peaks.
“With job creation and historically favorable affordability conditions,
people are buying homes and renting apartments,” said Walter Molony, an
NAR spokesman. “Rising rents are encouraging long-time renters to buy a
home as a hedge against inflation, so we have the unusual situation of
seeing both rental and buying demand rising at the same time.”
It's springtime for builder confidence
Buyers are getting serious, and that's giving home-builder confidence a major boost. The National Association of Home Builders' David Crowe talks about why builders are in their best mood since spring of 2006.
Low inventories have price implications.
“The low inventories are also driving up home prices and will probably
continue to drive prices up next year,” said Patrick Newport, U.S.
economist at IHS Global Insight.
However, official data likely understate supply given shadow inventory from foreclosures and wary owners.
“Nonetheless, the improvement in virtually every home price measure
combined with rising home-builder confidence suggests housing
inventories have tightened,” Conrad DeQuadros, an analyst at RDQ
Economics in New York.
And the housing market will face greater demand as the pace of household formation picks up after taking a hit in the recession.
“Our population has been growing…Household formation is now coming back
and is fairly close to normal,” Molony said. “A large pent-up demand had
been building.”
There’s a substantial gap to make up: Only about 500,000 households were
formed on average in each of the three years after the start of the
Great Recession, down from an annual average of about 1.5 million
between 1997 and 2007, according to Timothy Dunne, an economist at the
Federal Reserve Bank of Cleveland.
Going forward, gains in household formation depend on the strength of
the labor market’s recovery, as well as the larger economy, Dunne said.
“While such increases in household formation will certainly aid the
housing market, it is an open question how increased formation will
affect the relative demands for rental or single-family owner-occupied
housing,” Dunne wrote.
Still, factors such as tight lending terms will “prevent the sort of
powerful housing recovery that has typically occurred in the past,”
Federal Reserve Chairman Ben Bernanke said Tuesday in a speech at the
New York Economic Club.
“Unfortunately, while some tightening of the terms of mortgage credit
was certainly an appropriate response to the earlier excesses, the
pendulum appears to have swung too far, restraining the pace of recovery
in the housing sector,” Bernanke said.
Read more on Bernanke’s speech.
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