Investing 101: Home Sales Are Up… But Don’t Get Too Excited Yet!

Stewart Miller | Estate Financial Group | Michigan Retirement Planner

As goes the housing market, so goes the economy.

OK, that may be a bit of an overstatement. But the strength of the economy in general is highly correlated to the strength of the housing market. When houses are selling, brokers are making commissions. Banks are making loans. Plumbers and electricians are finding work. Neighborhoods are filling up and local businesses are seeing an increase in demand. Builders are constructing new homes to meet demand.

On the other hand, when homes stop selling (or worse, face foreclosure), everything grinds to a halt.

In fact, if you remember, the “great recession” of 2008 and 2009 was in many ways caused by the collapsing housing market. The market had become “overheated” in the early part of the decade, which meant that prices were artificially high and that many homeowners had loans they couldn’t afford to repay.

When prices crashed and borrowers stopped making payments, the housing market crashed. And so did the stock market… and the economy as a whole. In recent years, economists have believed that we won’t have a true economic recovery until the housing market recovers. That’s why recent news has been so encouraging—although it’s too soon to declare that the market is “back.” A recent article notes:

The spike in new home sales in January is a clearly a very good sign for the U.S. real-estate market, but investors shouldn’t get too giddy about housing. While the trend is up, the industry has a big hill to climb.

The monthly report on new home sales is always difficult to figure because it’s often very inaccurate on the first read. Sales figures are constantly revised later on, sometimes sharply so, particularly in the winter months. That’s why economists examine at least three or four months of sales to figure out the trend.

Still, the January report holds a lot of promise. For one thing, the fastest pace of sales in four and a half years offers the clearest proof yet that the housing-market recovery is here to stay. Sales in January jumped 15.6% – the biggest one-month gain in 20 years – to an annual rate of 437,000.

How big is that? … Continue Reading:


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