Housing Takes A Leap Ahead

By Nick Timiraos, The Wall Street Journal

Home sales and construction jumped to their highest levels in more than two years, offering the strongest signal to date that the U.S. housing sector has turned the corner after a six-year rout.

“The housing recovery has indeed started,” said Michelle Meyer, an economist at Bank of America Merrill Lynch. Single-family housing starts in August rose by 5.5% from July to their highest level in 28 months, the Commerce Department said Wednesday. In August, builders started construction on 535,000 homes at a seasonally adjusted annual rate, up 26.8% from one year ago. Overall housing starts were up by 2.3%, amid a small drop in the more volatile multifamily sector.

Meanwhile, sales of previously owned homes in August rose by 7.8% from July to their highest level in 27 months, the National Association of Realtors said. Sales climbed 9.3% from a year ago, marking the 14th straight year-over-year sales increase, even as the number of homes listed for sale was down sharply.

Stronger sales and construction should help the economy in two ways. Rising prices could help reassure would-be buyers that it is no longer foolish to buy a home. Higher levels of new-home construction, meanwhile, will create jobs. Home values were up in 91 of 177 markets from a year ago in August, according to real-estate company Zillow Inc.

There are still plenty of reasons for caution. Sales and construction levels are well below even their pre-bubble levels, and the year-over-year comparisons look better in part because 2011 was so weak. Other headwinds include a more rigorous mortgage-qualification process and the fact that many would-be buyers have either too much debt to qualify for a loan or too little home-equity to sell their current residence and buy another home. Foreclosures are also still high.

Still, Wednesday’s home-sales report offered evidence that traditional owner-occupant buyers are returning in force, replacing investors that helped lead the charge earlier this year. Demand has been buoyed by mortgage rates that continue falling to their lowest recorded levels.

While job growth isn’t as strong as most economists would like, even modest gains are lifting sales. “There are a lot of folks getting off the fence,” said Dean Wehrli, a housing analyst based in Sacramento, Calif., with John Burns Real Estate Consulting. “They weren’t underwater, they didn’t lose their jobs in 2008, 2009, and 2010, and they just got sick of waiting.”

Home sales were strongest in the Midwest which reported a 17.9% year-over-year gain, and the South where the increase was 11.1%. They were flat compared with one year ago in the West, where many markets have seen sharp declines in listed inventory over the past year.

Kyle Friedrich looked into buying a house near Sacramento, Calif., during the past two summers, but didn’t have a stable job until this year. “Once I got my job, I said, ‘Let’s go,’” said Mr. Friedrich, a 23-year-old engineer for a general contractor. He lost out on the first four homes where he made offers. Like many entry-level buyers, he faced competition from investors who can bypass a time-consuming mortgage-approval process by making all-cash offers.

In June, Mr. Friedrich bid the full $210,000 asking price on a three-bedroom foreclosed home in Carmichael, Calif., that an investor had bought and spruced up. Two appraisals said the property was worth less than the agreed upon price, which nearly derailed the deal. The seller, who happened to be Mr. Friedrich’s former youth baseball coach, agreed to drop the price to $189,000. Mr. Friedrich isn’t worried about home prices falling further. “I bought what I could afford,” he said.

Inventories are down from a year ago. That is in part because banks have sharply slowed their pace of foreclosures and in part because investors have converted more homes to rentals, taking them out of the for-sale pool. At the current pace of sales, it would take 6.1 months to sell the listed supply of homes, down from 8.2 months of supply a year ago. Real-estate agents generally consider a balanced market to have six months’ supply.

Rising demand and shrinking supply are boosting the prospects of home builders, long sidelined by competition from a glut of foreclosed properties. “Frankly, there just isn’t a lot for buyers to choose from in the re-sale sector right now,” said Richard Lafferty, chief executive of Lafferty Communities, a small private builder in San Ramon, Calif. Mr. Lafferty said he is on track to sell 50 homes in Oakwood Shores, a development in Manteca, Calif., about an hour east of the San Francisco Bay this year. He purchased the development in 2009 from three banks that had taken over some 450 lots and 25 unfinished homes. “At this stage in the game, we’re looking really smart,” Mr. Lafferty said. During the market’s peak, nearby homes sold for as much as $900,000. Today, Mr. Lafferty is selling homes in the mid-$400,000 range, and has sold 14 in the past three weeks.

Last weekend, his company showed off the homes by catering a dinner at the development for 35 real-estate agents brought in by tour bus. The goal: lure potential buyers frustrated by the lack of move-in ready housing in the area.

The lack of attractive inventory is having “the single biggest impact on new-home sales right now,” Mr. Wehrli said.

Mr. Lafferty said he plans to start construction on two other developments in nearby Livermore next year.

More than one-quarter of homes listed for sale in August had gone under contract after two weeks or less on the market, according to Redfin, a real-estate brokerage that operates in 19 markets. The share was significantly higher in many Western U.S. markets that have seen the nation’s most dramatic inventory declines. In San Jose, Calif., for example, more than half of homes went into contract in two weeks.

A version of this article appeared September 20, 2012, on page A3 in the U.S. edition of The Wall Street Journal, with the headline: Housing Takes a Leap Ahead.