The Broader Implications of a Housing Rebound

We, at Hennion & Walsh, are observing growing momentum towards the stabilization of the residential real estate market as well as an intriguing opportunity for inclusion of this alternative asset class in diversified growth portfolios.

For example, existing-home sales remained strong in May, largely due likely to the extension of the Federal home buyer tax credit program, in addition to the stabilization of home prices nationwide along with the lowest mortgage rates in history. On a concerning note, despite the total inventory of houses falling in May, inventories of unsold homes increased 2.5% in June, representing an approximately 9 month supply of unsold homes – the highest since August of 2009. Existing home sales need to continue to increase in order to clear-out the excess supply of residential homes on the market, yet today we learned that existing-home sales fell by 5.1% in June, which shouldn’t be overly surprising given the end of the tax credit program.

As with housing marketability, the adage of location, location, location also applies to this residential real estate recovery. Geography and price range clearly are having an impact on the ongoing attempt at a national recovery in the real estate market. As the charts below from the National Association of Realtors® suggest, with the exception of homes under $100,000 on the West coast, sales of homes have increased significantly across the board in the past year.

While it remains to be seen what overall lasting effect the termination of the tax credit program will have on the existing home sales momentum, we did receive a glimpse of the impact of the program’s expiration on pending home sales. Pending home sales, which represent sales of existing homes where contracts have been signed but the transaction has yet to be completed, are often viewed as a leading indicator of the housing sector. In May, as many expected, pending home sales declined 30% and are down over 15% on a year-over-year basis. This leads us to question how much of the surge in existing home sales in 2010 has been solely attributable to the tax credit program.

The continued recovery of the residential real estate market is needed for the U.S. economy to mount a sustainable recovery due to its implication on personal household balance sheets and overall consumer sentiment. Remember that real estate holdings still account for large majority of household net worth profiles.