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Weekly Update: Slow but steady recovery, who is taking notice?

James W. Paulsen, chief investment strategist at Wells Capital Management, noted that “for the first time this recovery, there are real signs that the housing market is actually improving. For instance, home prices in June rose 2.5 percent over the same period in 2011, according to CoreLogic, which tracks real estate data. Strip distressed homes from the calculation, and prices jumped 3.2 percent.

“Every economic recovery in the post-war era has coincided with improvements in housing—except this one—he noted. ‘This may finally be changing,’ Mr. Paulsen said, adding that this could also bode well for the job market.” [Paul J. Lim, The New York Times 8/12/2012]

Wall Street is noticing. The numbers are improving for real estate and the big money managers are watching carefully.

But to say that economic recoveries have always “coincided” with better housing sales? Improvements in housing come when certain forms of stimulus—the same ones that warm the retail sector—begin to affect the goods-and-services markets’ sales volumes. For example, more housing sales mean more carpets are laid means more workers are employed, etc. It’s not a big mystery.

So many retail goods and important services are affected by the health of the real estate market that we can count on improvements in a wide range of economic indicators and, yes indeedy, “this could also bode well for the job market.”

But let’s look for a moment at one of the most remarkable housing recoveries in the nation. Recent computations show that the city to study is Phoenix, “where list prices were up 29.73% in the second quarter, compared with the second quarter of 2011, and for-sale inventory plunged 44.2% over that time.”

This situation is repeated, though to a less dramatic effect, in many other cities and areas today—Oakland, Miami, Boise, San Jose, Bakersfield, San Francisco, and others. It comes down to a lack of inventory, on the one hand, and a sizable growth in demand. The recovery of the economy in the Silicon Valley, for example, has meant more jobs, and that’s meant more homes are needed for the newly-hired employees.

But there’s a statistic that should catch our eyes. In the fourth quarter of 2011, 54.5% of the homes in the Phoenix area were underwater. By the end of the first quarter of 2012, the number had declined to 46.2%.

This means that the inventory squeeze and the potential buyers willing to bid up selling prices of available homes have increased the value of homes enough to pull a surprisingly large percentage of them out of the water. These are homes that can now be sold without a short sale, homes that are unlikely to face foreclosure. It is a real estate market healing itself. Granted, it has a long way to go, but we need to see that it has already come a long distance. Very few people, a year or more ago, were predicting that the problem of a huge foreclosure overhang—the much-discussed “shadow inventory”—could be eased this quickly or—dare we say?—easily.

Many investors have long been betting on this process. As a consequence, a high percentage of home sales over recent years have involved investors who paid cash—an act of considerable faith—for the properties they bought.

A lot of money has been bet, therefore, on the Phoenix recovery. Many investors feel that there are lots of other markets whose approaching appreciation rates warrant such bets.

All of which is to say that, despite the uncertainties still surrounding this real estate recovery, chances are good that we’re headed to higher ground in a majority of American real estate markets. At least, that’s the way I tend to read all of this.

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