If you're waiting for home prices to go up, then you're missing signs the troubled housing market has finally turned around.
FORTUNE – Over the past few months, many economists have concluded that that the U.S. housing market has reached a turning point and is healing. This may sound hard to believe, since home prices have continued their downward trend. In 2011, prices fell by 4% following nearly a 30% decline since the property bubble paeked in June 2006. They ended the year at a 10-year low.
Indeed, prices aren't likely going to rise for a while. But this might not necessarily mean the housing market isn't on the mend. Perhaps we're looking at the recovery all wrong, says Paul Dales at Capital Economics. In a report to clients recently, the economist said higher prices won't be the sign that tells us there's a realrecovery under way. Rather, the recent pick-up in sales is what we should pay attention to.
After all, prices tend to be a lagging indicator. It could take six months for any improvements to show in the market, if not longer.
"Even if the asking price is at the right level when the home is first listed, it may still take a few months to find a buyer and another month or so before the contract is closed," Dales wrote to clients last week. "The selling price that is registered at the end of this process therefore relates to the market conditions somewhat earlier."
Sales have risen recently, reaching a few milestones.
In 2011, existing home sales climbed to 4.26 million – higher than the 4.19 million sales in 2010. Needless to say, this is far below the market's peak of 7.1 million sales amid the housing boom in 2005. But it's worth noting that for the past two years, sales have crept up from the market's low of 4.1 million sales when the market collapsed in 2008. In particular, in the past six months, total homes sales have risen by 13% as borrowing costs for home mortgages continue to fall to record lows and investors making up the bulk of sales find opportunities in heavily discounted properties after foreclosures and short sales.
And in Denver, there is a 13.7% increase in closed sales over year, and an unprecedented 45.5% decrease in Absorption Rate (4.2 months), along with a 2.1% increase in average sold price ($270,821)
And a series of home sales data released later this week is expected to show that home purchases probably climbed in February to their highest level in nearly two years, according to forecasts in a Bloomberg survey. Sales of new and previously-owned properties combined are expected to rise to an annual rate of 4.93 million – the strongest since May 2010, and up from 4.89 million in January.
The evidence reminds us that perhaps we should change our expectations of what a housing recovery might look like, particularly following a crisis marked by record foreclosures and a financial crisis that sent the economy into one of the deepest recessions. The recovery we have been anticipating is defined more on the rate at which the glut of vacant properties comes off the market as opposed to any steady rise in prices, which some think won't happen for another few years.
The inventory of unsold homes has dwindled, falling in January to 6.1 month's worth of supply – its lowest level since March 2005. A supply of six months is generally considered ideal for a healthy housing market, but there continue to be several headwinds at play that could weigh down prices.
