At first glance, the recent U.S. housing sector data does provide a glimmer of hope for everyone counting on a real estate recovery in 2010: Home builder confidence rose in May and housing starts increased for the second straight month in April.

However, digging a little deeper reveals a more somber picture: Housing sector conditions have improved since the lows recorded during the depths of the recession, but neither builder confidence nor housing starts have reached levels considered healthy by historical standards.

The National Association of Home Builders housing market index unexpectedly jumped to 22 in May from 19 in April -- and reached its highest level since July 2007 -- but the increase doesn't tell the whole story regarding builder sentiment.

Index readings over 50 indicate that more builders view sales conditions as good than poor, so while home builder sentiment has risen, it's still largely negative.

By comparison, let's look at the later half of the "Roaring '90s." After moving into positive territory in early 1996, the index did not drop below 50 for the remainder of the decade, and rose above 70 during the late 1990s.

In the next decade, home builder sentiment did plunge to 46 in October 2001 from 55 in September 2001 -- which was understandable, given the shock and uncertainty that griped the nation in the wake of the 9/11 terrorist attacks. But sentiment quickly rebounded and the index didn't drop below 50 again until May 2006. The subsequent bursting of the housing bubble in 2007-2008 would lower the index to an abysmal 8 in January 2009.

With the above as context, one can get a more accurate read on today's more modest trend: Home builder confidence has risen during the past year and a half, but it's not healthy yet.

Housing Starts: Similar Progress

The trend is similar regarding housing starts. Starts rose 5.8% to a seasonally-adjusted annual rate of 672,000 units in April, according to U.S. Commerce Department data, and are up a significant 27% so far in 2010. Clearly, more building activity is occurring.

Still, investors need to keep in mind how far building activity has fallen. Even excluding the statistics from the home building "mania" years of 2004-2006, when starts exceeded a 2 million-unit annualized rate, starts are still less than half the 1.3 million to 1.7 million unit annualized rate seen during the economic expansions of 1983-1988 and the 1990s.

The major unknown regarding housing demand is whether, in the years ahead, the market will return to levels similar to those historical norms. The U.S. economy is undergoing structural changes -- one factor behind the nation's high unemployment rate. Further, job creation -- a key to household formation -- has historically been a major factor correlating with rising home sales. True, the U.S. economy has added about 500,000 jobs in the past two months, but it will have to demonstrate that it can consistently add about 200,000 jobs per month in the quarters and years ahead, to both maintain the economic expansion and keep home starts and sales trending higher.

As one might sense, that won't be either an easy or a modest achievement, which is why it would be premature to declare an end to the U.S. housing sector's woes.

Increase your money and finance knowledge from home

Building Credit from Scratch

Start building credit...now.

View Course »

Intro to Retirement

Get started early planning for your long term future.

View Course »

Add a Comment

*0 / 3000 Character Maximum