Financial markets hit 2 ½ year highs – will real estate follow?

The financial markets continued to improve over the past few weeks with both the Dow Jones Industrial Average and the S&P 500 reaching and surpassing two key milestones. The Dow eclipsed the 12,000 threshold and the S&P climbed over the 1300 level for the first time in two and a half years. Both milestones are viewed by market watchers as important barometers, not only of the health of Wall Street but consumer sentiment on Main Street.

Steady improvement in the financial markets is putting the Great Recession even farther behind us. It means that retirement accounts for millions of Americans have erased much of the losses inflicted by the sharp downturns of 2008 and early 2009. Two years ago next month the Dow stood at 6,547 and the S&P at 676. Since then, they’ve nearly doubled in value. It’s an encouraging signal that the economic recovery is gaining traction, albeit slower than most of us would like.

So what about the real estate market? In general, the nation’s housing market remains fragile. While there has been improvements in many communities since the depths of the recession, including here in the Bay Area, the market overall continues to be challenged by high unemployment rates and the shadow inventory of additional homes that could fall into short sales or foreclosures.

While acknowledging all of the economic headwinds, Rick Newman, chief business correspondent for U.S. News and World Report, wrote this week that the stage could be set for a solid recovery in the housing market this year. “A buzzer won't go off when it happens, but 2011 could be the year that the housing bust officially ends,” he said.

Nationwide, prices have fallen by about 30 percent since the peak in 2006, and Moody's Analytics thinks they could fall another 5 percent or so in 2011. “But improvements in the overall economy will lift the housing market sooner or later, with many buyers who have been sitting on the sidelines finally deciding to take the plunge,” Newman writes. “In a few markets, that already appears to be happening.”

U.S. News says home buyers are tiptoeing back into the market, amid an increasing number of signs that the fifth year of the housing bust might be the last. “Economists are watching closely for an inflection point at which the housing market turns upward for good. But for buyers planning to live in a home for years, precise timing matters less because they also need to take into account the direction of interest rates and their own personal need for housing,” Newman said.

“With flippers and speculators largely out of business, most buyers simply want to know that the home they buy won't plunge in value once they own it. In many U.S. cities, that now looks to be the case,” he adds.

U.S. News points to four reasons that home buyers may be feeling more confident that it's safe to step off the sidelines:
In some markets, homes are now undervalued. According to the Case-Shiller home-price index, overall prices nationwide have fallen 30.3 percent since peaking in 2006. Moody's, for instance, says that homes are undervalued in many cities, based on the ratio of home prices to median income.
Affordability is excellent. Falling prices, plus falling interest rates, have made homes more affordable than they've been in decades. The National Association of Realtors' affordability index, which goes back to 1970, is at the highest level it's ever been. The typical family today needs to spend just 13 percent of its monthly income to pay the mortgage on a median-priced home, compared with nearly 25 percent at the peak of the housing bubble.
Economic factors that affect housing are improving. Most economists believe the recession is over for good, with the risk of a double-dip fading rapidly. Consumers are spending again, and the economy is growing. Big companies have lots of cash and are in a good position to hire once business picks up. A rally in the financial markets is helping many Americans recover some of the wealth they've lost through falling home values. Those trends all support increased higher demand for homes.
The government will continue to support housing. There will likely be continued political debate over Fannie Mae and Freddie Mac, the troubled housing agencies now operating under government control. But despite some calls for a private system to finance housing, it's likely the government will remain a key player in the mortgage market until at least 2013, after the next presidential election. And once policymakers figure out how to replace Fannie and Freddie, it will probably happen slowly, so as not to upset the housing recovery.
While it’s still too early to tell for sure where we are in the recovery, anecdotal reports from our field offices tell us that things are gradually moving in the right direction. Buyers are easing back into the housing market in many Bay Area communities. As we approach the spring buying season it will be interesting to see how this translates into sales. Stay tuned! http://www.cloneyrealestate.com/