The Three Most Potent Forces Underpinning the Real Estate Recovery

by Wall Street Daily
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Submitted by Wall St. Daily as part of our contributors program.

It’s hard to argue that the housing market isn’t recovering. Not when months and months of indicators – including new home sales, prices and construction – keep coming in on the positive side.

That being said, many investors do believe the recovery won’t last very long. But this couldn’t be further from the truth. And I don’t mind setting the record straight (again).

I declared that the real estate market hit rock bottom in February. Nobody wanted to hear it, though. How do I know? Because subscribers lambasted me from far and wide for bloviating.

That is, until the data proved that real estate prices did, indeed, bottom out that very month.

I say this not to brag, but to point out that I don’t mind going out on a limb to make a bold prediction. As long as the data warrants it.

On such merits, I have no problem predicting that real estate will be one of the economy’s strongest growing sectors in 2013.

And here are the three most potent forces underpinning my bullish stance…

~ Affordability

Mortgage rates haven’t been this low. Ever. Median home prices are back to late 1970s levels. And that’s driven the mortgage-to-rent ratio down to a record low (under 0.70).

In other words, there’s never been a more affordable time to buy a house. And a gradually improving labor market promises to encourage more and more Americans to take advantage of the once-in-a-lifetime bargains.

Especially since banks are bound to start loosening their “overly tight” borrowing requirements, in the words of Fed Chairman Ben Bernanke. Sounds like a direct order to me.

~ Underinvestment

It’s simple arithmetic: More households (i.e. – family units) in America means that we need more houses.

But we haven’t been building them.

While the number of households has increased by over one million in the last year, housing starts were actually the lowest in 52 years in 2008, 2009, 2010 and 2011.

Put simply, we’ve got a lot of catching up to do on new home construction just to reach equilibrium with the market. And JP Morgan (JPM) estimates that we’ll need six million more homes between now and 2017 just to keep up with population growth.

Let the building begin!

~ Momentum

Real estate tracker Zillow (Z) reported that prices bottomed out for 71% of U.S. housing markets by the end of the third quarter. Many markets are now witnessing price increases.

And the one thing I know about rising prices? They encourage even more increases.

Or as Joshua Steiner and Robert Belsky of Hedgeye put it, “Housing is highly auto-correlated. Strength in prices will feed back into strengthening demand, which will further reinforce prices.”

The good news is, even after the latest price increases, we’re still nowhere near the peak levels. So there’s still plenty of room for even more price momentum to take hold.

Bottom line: Housing’s back – and there’s no question that this recovery has legs. Invest accordingly.

In the latest issue of WSD Insider, I recommend the three best ways to play the trend. To access my research, simply upgrade your subscription to Insider status today.

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