S&P Signals Why the Housing Recovery is Underway - Why?

After what it called years of tenuous signals indicating that the housing recovery was underway Standard & Poor's (S&P) Ratings Service say this time it is different Why is this time different?  Roundtable participants said the most critical factor is the 6.8 national increase in home prices in 2012.  S&P projects that prices will increase another 8 percent this year.

"Rising prices are a good cure for a lot of headaches," Erkan Erturk, a senior director in S&P's Structured Finance Research Group said.  "Prices also provide a good summary of the broader housing market. 

Erturk said the housing market recovery has positive implications for the economy, consumers, and local governments as sources of tax revenue.  Robust sales, falling if still elevated mortgage delinquency rates and foreclosure sales and increasing residential homebuilding are all key indicators that the sector is rebounding.

"There were a few false recoveries in 2010, driven by tax credits and other government supports," Erturk said.  The housing market had bounced around the bottom for several years, but a recovery began shaping up in late 2011 into 2012.  "2012 was a significant year - the recovery was strong, and the turnaround came faster than we'd anticipated."

Other positive signs include the shadow inventory which is diminishing because of rising home prices which are also pushing about two million homeowners into positive home equity positions.  Still, affordability remains high for would-be-homeowners.

Despite these improving indicators Erturk said a full recovery will require correction of regional and national imbalances such as the existing 40 percent gap between new and existing median home prices.  "In the long run," he said, "we would need to see existing median home prices rise to be consistent with historical 20 percent levels."

Government intervention such as Federal Reserve purchases of mortgage-backed securities (MBS) continue to cause distortions.  "So you could argue if the support disappeared, the market couldn't sustain the recovery," Erturk said.