Wells Fargo Group Reports Housing Gains, Cautions Against Optimism

In a report released Thursday, ""Wells Fargo's Economics Group"":https://www.wellsfargo.com/com/research/economics/ cautioned that although the housing recovery is picking up steam, the good news needs to be placed in the larger context of a weakened market.

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The group's Housing Data Wrap-Up for June 2012 shows that even with the overall economy slowing, the recovery in the housing market seems to be picking up momentum. A mild winter boosted construction in the Northeast and Midwest during what is traditionally a slow season, giving builders more inventory to sell in the spring. In addition, the new construction during the first five months of the year showed modest gains in employment, increased household formations, and resurgent demand for apartments.

New home sales through May ran 18.2 percent above their pace from a year prior, and the Northeast saw a 30.7 percent boost in sales. New home construction has increased with demand-single-family starts are up 20.4 percent in the first five months of the year compared to 2011, and multi-family starts increased 44.6 percent.

Home prices also solidified, with the S&P/Case-Shiller ""20-City Home Price Index"":http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us---- increasing 0.7 percent in April and showing a revised gain of 0.7 percent in March. Prices have increased for three straight months and are up at a 6.2 percent annual rate over that period. While the S&P/Case-Shiller Index shows prices falling 1.9 percent over the past year, the group believes that prices have hit a bottom.

On a regional basis, prices increased in 17 out of 20 markets covered by S&P/Case-Shiller, and no markets hit new lows. Prices came back up fastest in some of the hardest-hit markets, including Phoenix and Miami. The report speculates that those areas probably saw prices overshoot to the downside and are now seeing them rise as investors pursue ""bargain-priced"" properties. Further evidence of this can be found in the ""CoreLogic"":http://www.corelogic.com/ Home Price Index, which shows a price increase of 0.4 percent in May, marking the fifth consecutive month of increases.

Median prices for new and existing homes also improved in recent months, though the group contributes the boost to a changing mix of sales.

With all the good news coming out, the group stressed the need to keep recent improvements in the housing market in perspective.

""Even with the recent gains, new home sales and residential construction remain shadows of their former selves. Residential construction currently accounts for just 2.3 percent of GDP, down from 6.3 percent at the peak and 4.5 percent for a more typical period. The tiny foundation from which the housing recovery is beginning means that even large percentage gains in housing starts will make only a modest contribution to real GDP growth,"" the group wrote in its report.

Housing is expected to add nearly 0.4 percentage points to real GDP growth in 2012, accounting for nearly one-quarter of the increase in overall growth. Because the market is at such a low base, the group believes that housing can strengthen even as the rest of the economy moderates.

""Fannie Mae"":http://www.fanniemae.com/portal/index.html and ""Freddie Mac"":http://www.freddiemac.com/ have both reported improved credit quality, and early-stage delinquencies are well below historic norms. The proportion of seriously delinquent loans has also greatly declined at both agencies. Appraisals seem to be normalizing in more areas, though they ""remain fairly conservative on an overall basis and are still keeping many would-be sellers on the sidelines.""

Easing in credit standards has not greatly helped home sales, which have been slowed by ""sluggish"" growth in household formations. In addition, a growing proportion of households are renting instead of buying. The number of owner-occupied homes has fallen by nearly half a million units while the number of renter-occupied homes has grown by more than 1.5 million. This shift shows two trends: First, investors are scrambling to purchase foreclosed homes to convert them into rentals. Second, younger people are choosing to rent in the face in uncertain employment prospects.

Finally, demand for rental apartments remains high. According to ""REIS"":http://www.reis.com/index.cfm, apartment vacancy rates slid 0.2 percentage points to 4.7 percent in the second quarter. Asking rents rose 1.0 percent, the largest quarterly gain in five years, and effective rents rose 1.3 percent, showing a reduced need for move-in incentives to attract new tenants. New York City and San Francisco saw large gains in rent, as did Seattle, Denver, and Boston.

Strength in apartment demand and rise in rents has spurred a mini-surge in new construction. Multi-family permits increased 58.4 percent through May this year and are far ahead of starts, indicating that more construction will occur.