Reality and Real Estate

There is significant data to argue that both local and national housing markets are on their way to recovery. There's also real reason to worry that the recovery is being fueled by the same sort of bubble-inducing cheap money that contributed to the original crash. Make no mistake, the American economy does better when home values and new housing starts are up, but if the system is being goosed by artificially low interest rates, there eventually has to be a reckoning.

Let's start with the good news, which is that indicators for both new and existing home sales are rosier than they have been in a long time. For the sixth straight month, housing prices have enjoyed year-over-year increases, including a robust 9.3 percent in February (the most recent month available), the biggest jump in seven years.

Housing starts or “new construction” is higher than at any point since July of 2008. And according to industry data, builders have been adding workers at a clip of 30,000 per month for five straight months now, all positive signs. As a result, housing sector analysts are predicting that 2013 will be the best year for housing since 2007.

Homes are also getting larger again, after average square footage of new homes shrunk during the collapse, which is also seen as a gauge of how healthy the market is. Commerce Department data shows that the median size of a new house built in 2012 was 2,309 square feet, breaking the previous record of 2,259, set at the tail end of the boom in 2006.

There are still about 7 million homes in the U.S. said to be “underwater”. The shadow inventory of banks who've foreclosed, but delayed taking possession of homes is unknown, so even by the most optimistic view, we're far from out of the woods on housing. Trulia's housing barometer, which measures the real estate market's back to normal factor on housing starts, existing home sales, delinquency and foreclosure statistics, has housing at 56 percent back to normal, and while that's only about halfway, the last two months have seen the biggest jumps since they started tracking recovery.

But what's driving the surge in property sales? I'd feel a lot better if it was falling unemployment and rising wages among workers – the two key ingredients to a typical upswing in the housing market. But those numbers, which would indicate sustainability of prices, are nothing short of terrible. The most obvious suspect would then be the flood of cheap money that has resulted from the Fed's quantitative easing policies, which has forced interest rates back to all-time lows – at least for the credit worthy.

As we saw during the boom, artificially low interest rates can have a quick and significant impact on housing prices, as the same monthly payment suddenly covers a much higher sale price. As I acknowledged, greater home values are good for the economy at large, but when prices are inflated by depressed interest, it becomes a dangerous game. A return to healthier interest rates will mean a sudden drop in home values, which can quickly reverse the sector's previous gains.

Another factor is the vulture's picnic. Large-scale investors and real estate-based funds have been making plenty of mass purchases from the low-end foreclosure market, in quick buys and sells that add to the numbers without really impacting inventory in a meaningful way. The foreclosed house next door to me has been vacant for over three years. In that time, it's transferred ownership on three occasions, while remaining vacant and continuing to dilapidate. Nearly 100 years old, it will almost certainly end up razed at some point, though it has nonetheless contributed three “existing home sales” to the data.

Some of the low-end inventory, including another in my neighborhood, is being purchased as rental investment, which is a good thing. The rash of foreclosures and other credit problems of the bust has pushed more residents into a tightening rental market and adding such properties to the rental pool will keep supply closer to demand, preventing rents from getting out of control, where they can eat up precious disposable income, stifling other economic sectors. Nonetheless, until more of this market is being bought by working-class residents who are able to manage a down payment and qualify for a traditional mortgage, it's hard to view the current data as a sign that the economy is improving. It should also be noted that despite the optimism, builder confidence is trending down, owed partly to an inability for would-be homebuyers to qualify for loans, creating a gap in expressed and viable demand.

At the heart of the housing sector's challenges lies the same dynamic that is jinxing nearly every other market in our economy – almost none of the economic gains of the past several years have been enjoyed by those outside of the most affluent class of Americans. Nowhere is this more obvious than in what is hands down the healthiest and fastest growing market in real estate: ultra luxury.

It was just over a decade ago that home sales in the wealthiest enclaves of the United States were breaking records with sale prices in the $15-20 million range. Today, our slow-growth economy not withstanding, sales in the $100 million-plus market are increasingly common. Such sales might go a long way toward bumping up the average sale price, but say much less about the economy than the factors which have historically led investors to believe that housing data is the most sound indicator of overall economic health.

At the end of the day, our economy relies on consumer spending for 70 percent of GDP. Until more Americans are fully employed and wages for the bottom 90 percent of those consumers increase, allowing them to consume more goods in the market, other indicators – even housing – have limited usefulness in terms of economic forecasting.

Dennis Maley's column appears every Thursday and Sunday in The Bradenton Times. He can be reached at dennis.maley@thebradentontimes.com. Click here to visit his column archive. Click here to go to his bio page. You can also follow Dennis on Facebook.