Optimism is rising on housing market

Data have a growing number of analysts saying the worst may be over for the sector.
By: Annette Haddad: latimes.com
Falling mortgage rates and a rally in home builder stocks are leading some analysts to suggest that the worst of the nation's housing slump may be over.

Although data released Thursday showed U.S. home prices making their smallest quarterly gain in eight years, some forward-looking indicators point to a stabilizing residential market.

Home builder stocks rallied sharply Thursday after an analyst's upgrade. The sector was one of the strongest in November, with the Standard & Poor's home builder index gaining 10% last month, extending a rally that began in July and suggesting that investors see an improving outlook.

"While this real estate cycle has yet to play itself out, we are skeptical of the dire warnings of pundits," Zachary Karabell and Daniel Chung, analysts at investment firm Fred Alger & Co., said Wednesday in a client note.

They joined a small but growing chorus — including Federal Reserve Chairman Ben S. Bernanke and his predecessor, Alan Greenspan — in saying the sector might have bottomed out.

The nation's housing market is still soft compared with the last three years, when prices and sales soared by double-digit percentages in many parts of the U.S., including California. There are three times as many homes for sale today and sales have declined as would-be buyers wait to see whether prices will fall. Even optimistic analysts say the sector may not be out of the woods yet, with some once-hot markets still vulnerable to further price and sales declines.

But recent drops in bond yields, which in turn have lowered mortgage rates, are helping to keep the housing sector from free-falling, some analysts say.

The average rate on a 30-year fixed-rate mortgage in the U.S. fell to 6.14% this week, according to mortgage giant Freddie Mac. That was the lowest rate in 10 months and below the year-ago rate of 6.26%. The 15-year fixed rate and the one-year adjustable rate also declined.

What's more, the once-dizzying pace of price appreciation has been replaced by low to moderate increases without calamitous results.

"The transition from sizzling markets to normal or weak markets has been orderly so far, and recent drops in interest rates lessen the likelihood that precipitous changes will occur," said Patrick Lawler, chief economist of the Office of Federal Housing Enterprise Oversight.

His Washington-based agency reported Thursday that in the third quarter, U.S. home prices rose 7.73% over year-ago levels, off a peak of 13.94% in mid-2004. On a quarterly basis, prices rose 0.86%, the smallest increase since the second quarter of 1998.

In California, prices in the third quarter rose 10.2% year over year, making it the 16th-best-performing state for home values, said the federal housing office, which compares prices of the same houses sold or refinanced over time.

On a quarterly basis, statewide prices ticked up a scant 0.62%, in line with other data showing low to flat price gains in many California locales.

California fared better than several states, including Massachusetts and New York, where prices declined from the second quarter to the third, the housing office reported.

Slowing price gains are among the factors that analyst Daniel Oppenheim cited Thursday as "incremental positives" that are easing his worries about the real estate market.

Oppenheim, who covers home builders for Banc of America Securities, believes that the sector is regaining some of its strength. He based his view on data he has collected showing increased traffic from potential buyers in 33 of 39 U.S. real estate markets, improved affordability and a concerted effort by home builders to pull back on construction as they sell off their bloated inventories.

"We believe that the improving affordability — due primarily to the decline in mortgage rates, but also the modestly lower home prices — is leading to the slight improvement in traffic," he said in a report explaining why he was shifting his yearlong stance on builder stocks from "cautious" to "neutral."

His comments buoyed home builders' stocks and helped propel the S&P's index of 16 major builders up 5.7% on Thursday.