11 Irrefutable Facts About the Real Estate Recovery
When I boldly predicted three months ago that the U.S. real estate market hit rock bottom, many subscribers objected. Vehemently.
One in particular told me to keep my crackpot predictions to myself. And then, a la Sgt. Joe Friday in “Dragnet,” he said, “All we want are the facts, Lou.”
I thought that’s what I provided on April 9, when I shared 11 irrefutable signs of a real estate recovery.
Maybe it was my wording – “signs” instead of “facts.” So today, let me make sure there’s no misunderstanding.
The real estate recovery is under way. And here are 11 more irrefutable facts to prove it…
Real Estate Recovery Fact #1: Better-Than-Expected Homebuilder Profits
On March 27, Lennar Corp. (NYSE: LEN) – the nation’s second-largest homebuilder – beat analyst expectations for earnings by 100%. New orders increased 33%. Backlog grew 39%. And total sales rose 30%.
Then, on April 23, D.R. Horton (NYSE: DHI) – the nation’s largest homebuilder – beat analyst expectations for earnings by 225%. (That marks the second consecutive quarter of stronger-than-expected profits.) New orders increased 19%. Backlog grew by 17%. And total sales rose 28%.
Real Estate Recovery Fact #2: Improving Builder Sentiment
With homebuilders putting up better results, we’d expect their outlook to be rosier. And it is.
On May 15, the National Association of Home Builders/Wells Fargo Housing Market Index rose to 29 from 24 in April. That’s the strongest reading since May 2007. It’s also a dramatic improvement from the reading of 14 registered just seven months ago.
Real Estate Recovery Fact #3: More Housing Starts
Homebuilders’ good results and good feelings are translating into increased activity, too.
On May 16, the Commerce Department reported new housing starts rose 2.6% to an annual rate of 717,000 units in April. And March’s figures were revised upward from an annual rate of 654,000 to 699,000.
Real Estate Recovery Fact #4: More New Home Sales
If you’re afraid homebuilders are getting ahead of the market, don’t be. Spring and summer typically bring out the buyers. And the facts show that’s happening once again.
Just yesterday, the Commerce Department reported new home sales rose 3.3% to an annual rate of 343,000 in April. Plus, March new home sales were revised upward.
And if we look at the last three months’ worth of data, new home sales are up 14% compared to last year.
Real Estate Recovery Fact #5: More Existing Home Sales
The smartypants in the bunch are certain to point out that new home sales only account for about 7% of the residential real estate market, down from a high of 15% in the last decade. So we shouldn’t read too much into increased new home activity.
That’s fair enough. But guess what? Existing home sales are on the rise, too.
On April 26, the National Association of Realtors (NAR) reported its Pending Home Sales Index, which tracks pending sales of existing homes, rose 4.1% in March to hit a 23-month high. Year-over-year, the Index rose 12.8%.
And unlike the days of old, these deals aren’t falling apart. They’re moving from contract to closing.
Case in point: On May 22, the NAR reported sales of existing homes in April rose 3.4% month-over-month and 10% year-over-year.
We’ve now witnessed 10 straight months of year-over-year gains in existing home sales. I’d say that qualifies as a trend, wouldn’t you?
Real Estate Recovery Fact #6: Historic Affordability
There’s no reason why the buying activity will suddenly dry up, either. Not with the NAR’s Housing Affordability Index at an all-time high of 205.9 in the first quarter.
The Index measures the relationship between median home prices, median family incomes and average mortgage interest rates to determine household purchasing power. To put it simply, there’s never been a more affordable time than now for the average American to buy.
Real Estate Recovery Fact #7: Dwindling Inventories
With demand clearly picking up – and affordability at an all-time high – the massive overhang in supply is becoming a thing of the past.
At the end of March, inventories of existing homes for sale hit a fresh five-year low. (See for yourself at Bloomberg here.) And inventories of new homes fell to 144,000 in March, the lowest level on record going back to 1963.
Supply in major metropolitan markets is even tighter. According to the online brokerage, Redfin, inventories dropped below the three-month supply level in markets like San Francisco, Silicon Valley, Denver, Phoenix, San Diego, Los Angeles, northern Virginia and Seattle.
Real Estate Recovery Fact #8: Fewer Foreclosure Filings
Worried about another wave of foreclosures flooding the market with more supply? We have less and less reason to be.
In the first quarter, foreclosure filings in the United States fell to the lowest level since 2007, according to RealtyTrac Inc.
Real Estate Recovery Fact #9: Fewer Distressed Sales
Like I’ve told you before, real estate prices are a lagging indicator. They’ll be the last fundamental to recover.
Before they do, though, we need to work through all the houses listed on the market at extremely discounted prices (foreclosures and short sales).
The good news? That’s happening.
In April, distressed sales dropped to 28% of all transactions, according to the NAR. That’s down from 29% in March 2012 and 37% in April 2012.
Real Estate Recovery Fact #10: Higher Prices
Speaking of prices, we’re finally witnessing the green shoots of a rebound.
On April 24, the Federal Housing Finance Agency (FHFA) reported that property values in February rose 0.3% month-over-month and 0.4% year-over-year.
That was first positive reading since 2007. And just yesterday, we got our second positive reading.
The FHFA reported home prices climbed 1.8% on a seasonally adjusted basis in March. Year-over-year prices rose 2.7%.
Heed the Facts or Be Sorry
Add up all the facts and we have no choice but to agree with NAR economist, Lawrence Yun, when he says, “The housing market has clearly turned the corner.”
As he goes on to say, “Rising sales are bringing down inventory and creating much more balanced conditions around the county, which means home prices will be rising in more areas as the year progresses.”
So if you wait around much longer for more facts to pile up in favor of a recovery, I guarantee you’ll miss out on profits.
How can I be so sure? Because my favorite real estate ETF, which I recently recommended to WSD Insider subscribers, is already up 24.4% in 2012 on the improving fundamentals. (If you want to find out the identity of the fund, all you have to do is sign up for a risk-free trial to WSD Insider here.)
Bottom line: All might not be well in the real estate market. But the overwhelming majority of fundamentals are moving from bad to less-bad, which is a clear sign of a market bottom.
So stick to the facts, fight your gut and position your portfolio to profit before it’s too late.
Ahead of the tape,