The root of the global financial crisis and resulting recession could be summed up in one word: housing. Fueled by cheap credit, shady-style mortgages and over-inflated home prices, the resulting speculative bubble popped hard and sent home prices into a tailspin. Those falling prices ultimately exacerbated all the rest of the problems facing the economy, and there are several long-term consequences from the recession.
However, the sun may finally be shining on the beleaguered sector. After several years of false starts, the evidence is finally starting to point to the signs of a real recovery. Prices are beginning to rise, new and existing home sales are increasing, and home builders are clearing lots and commencing construction. Overall, 2012 could be the year that housing finally bounces back.
SEE: Is The Housing Bubble Over?
Positive Home Sales
After years of struggling to find its footing, the U.S. housing market may finally be hitting its stride. The latest set of data points to a continued recovery in the market. According to statistics provided by the National Association of Realtors, more Americans than estimated signed contracts to purchase previously owned homes in May. The industry group's index of pending home re-sales climbed 5.9% to 101.1. That matched a two-year high reached in March, after falling 5.5% in April. When compared to last year, May pending previously owned home sales jumped more than 15.3%.
Pre-existing home sales are an important statistic to watch. Currently, about 93% of the housing market in the United States is made up of older homes. Getting these older homes sold is critical piece of housing's recovery. So far, sales of previously owned houses have steadily climbed since reaching a low in July 2010 of 3.39 million units sold annually. The recent pop in signed contracts will put 2012 on pace to reach 4.55 million units. That's quite an improvement, but still below the 7.25 million unit annual rate reached in 2005 as the subprime lending market was gaining steam.
New Homes Get a Boost
The road to recovery doesn't just stop with pre-existing homes. New construction is also a critical component and is seeing a boost as well. Permits to build new homes rose throughout the previous month. These authorizations jumped 7.9% in May to a 780,000-unit pace. That was the highest since September 2008 and well above analysts' forecasts. Additionally, groundbreakings on new homes saw a fifth straight month in a row of at least 700,000 units.
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Finally, median home prices began to show some muscle as well. Sales transactions that involve both foreclosures and short sales, declined throughout the month. Short sales occur when a lender agrees to accept less than the balance of the mortgage in exchange for ridding itself of the housing inventory. With less of these types of sales taking place, median prices for a previously owned home shot up 7.9% versus the same period last year.
Still Some Clouds
While things are looking up for the housing market, there are still some rough patches to contend with. There are still millions of people that remain underwater on their mortgages. This means they owe more on their homes than what they are currently worth. In some areas of the housing market, that premium is nearly double from current values. Likewise, there are still a huge percentage of families at risk of foreclosure. Additionally, Europe's continued debt crisis has started to affect the global economy. Hiring in the United States has slowed every month since February as the E.U.'s problems begin to slow global growth. These persistent issues could pull the rug right out from under the housing recovery.
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The Bottom Line
So, where does that leave the housing market for the next six months? While it's too early to call it a full on recovery, the continued positive data could indicate that the sector has finally reached a bottom. Falling home prices seem to have stabilized in many areas, and job growth, albeit slowing in recent months, has occurred. Equally, interest in new construction remains robust. All of this could mean that the longest and deepest slide in the housing market since the Great Depression could finally be coming to an end. Based on the new data, many analysts now predict the housing sector will add to economic growth this year for the first time since 2005. That certainly will be a welcome state of affairs.