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For Housing, 2012 Saw Return to Stability

Is your home’s value higher today than it was 12 months ago?

For much of the country, the answer is “yes.” According to the Standard & Poor’s/Case-Shiller home price index, the national composite selling price was up 3.6% in the third quarter compared with the same period a year ago, and it was 2.2% higher than the second quarter of this year. Home prices were up 0.3% in September, making it the sixth consecutive month with an increase, and positive monthly returns were seen in 13 of the 20 cities S&P tracks.

And October is lining up for more of the same, according to data from the National Association of Realtors, released in late November. Its index of pending home sales rose 5.2%, exceeding most estimates  and setting up for a potentially stellar sales season in spring 2013.

"With six months of consistently rising home prices, it is safe to say that we are now in the midst of a recovery in the housing market,” David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices, said in a statement.

A Long, Slow Climb

But hold on there, Blitzer. We’ve certainly come a long way from the depths of the 2008 housing crash, but just because things have stabilized doesn’t mean we are out of the woods just yet. In fact, some feel the recovery is on shaky ground, more a construct of loose government policy and cheap money than any sort of real fundamentals. Between January 2009 and August 2012, home prices in the nation’s 10 largest cities were down 2.4%, and we’re still down about 30% compared to the 2006 peak, according to S&P/Case-Shiller.

“Currently, housing is one of the few bright spots in the economy,” Barry Ritholz, CEO of FusionIQ and founder of The Big Picture blog, said during a late-November appearance on The Daily Ticker.  “The problem with housing continues to be it’s not an organic recovery, or stabilization, to use a better word. The [Federal Reserve has] driven mortgage rates down to inconceivable levels.”

And, of course, all real estate is local, so there’s enough room for both winners and losers. The best property markets are currently centered in areas that were hard hit by the recession; some areas in California, in particular, have seen prices drop by more than 50% since the 2006 peak, making them ripe for deal-seekers, while the Rust Belt, deep South and parts of the Midwest continue to struggle.

The good news is that the results of the recent presidential election should bring some measure of certainty and predictability back to the housing sector overall. According to CNBC, incumbent presidents often see a boost in housing prices during their second terms, and the S&P/Case-Shiller national quarterly index rose by 2.6% during President Obama’s first term, leading many to predict  the trend will continue through 2016.

Sales on the Rise

At the moment, the big story is that homebuyers nationwide are returning to the market  and that sales prices are up almost across the board – although there is some variability. For example, prices jumped 20.4% in the Portland, Ore., metro area in September while falling 2.3% in New York City. Prices are near a five-year high in Denver, and they jumped more than 20% in Phoenix in the past year.

Looking ahead, home prices are forecast to rise 5% in 2013, with many industry analysts are saying  home prices have officially “bottomed.”

However, this optimism is a long way from where we started the year. As recently as December 2011, market watchers were questioning the very concept of a rebound, and many were caught off guard when housing starts jumped 9.3% late last year to reach their highest level in 19 months. Brian Bethune, chief economist at Alpha Macroeconomic Foresights, told The Washington Post at the time that, as of late 2011, housing had switched to being a drag on overall growth to a “modest positive” contributor.

But any growth is tenuous at best, given the glut of foreclosures currently weighing on the market. “We are expecting a gradual improvement, but if we get a big wave of new foreclosures coming to the market, price declines could be great,” BNP Paribas economist Yelena Shulyatyeva told Reuters in the spring.

Still, momentum is building. According to a September report from Fiserv, prices are on track to average a 3.7% annual improvement over the next five years. At that rate, we won’t get back to the national average high price of $238,000 until 2023, but who’s counting?

Homebuilder Profits Returning

Slow progress or not, this has all been generally good news for the country’s homebuilders. In fact, the pace of new home building is back to where it was four years ago, according to a November report from the U.S. Census Bureau.

And this positive boost has extended to homebuilder stocks, which have enjoyed a solid rise this year. Two of the S&P 500’s top-performing stocks of 2012 – PulteGroup (PHM), up 149%, and Lennar, (LEN) up 83% – are from the housing sector, and the SPDR Homebuilders ETF (XHB) has gained 46% in the past 12 months.

Will it continue? Can it continue, given strict new mortgage lending standards, overhanging foreclosure inventory and skittish new buyers? Only time will tell, but for the first time in years the U.S. housing market found its footing in 2012. The real question now is whether 2013 can build on this momentum or if we risk slipping back into the abyss once again.