Green Shoots for Housing (Again?)

It was a year ago in April that Federal Reserve chair Ben Bernanke declared he detected the "green shoots" of an economic recovery. But 12 months later, a lot of homeowners are left wondering why a significant housing recovery never seemed to blossom. Well, this spring, the green shoots are back. But this time, they're sprouting buds. The most encouraging evidence that a mini-housing boom is taking root this spring? Developers have started building new homes at their fastest rate in over a year.

Home builders started work on houses and apartments at a seasonally adjusted annual rate of 626,000 in March, according to the latest data from the U.S. Census. That's up from 616,000 in February and up even more from most of last year, when housing starts ranged between 521,000 and 593,000 per month.The new construction follows a jump in pending home sales for February and an increase earlier this month in mortgage applications by the Mortgage Bankers Association.

But is the housing recovery for real this time?

The burst of building probably represents real demand for the homes, since in these tough times many developers won't start construction a single-family house before they have a strong potential buyer lined up. Home builders also asked for more building permits in March than any time in the last year, clocking a seasonalized annual rate of 685,000, up from 637,000 in February. The rate of permitting stayed in the 500,000s for nearly all of 2009.

These reports are yet more evidence that demand for housing is getting stronger, as the expiration of the federal new home tax credit lures home shoppers out into the market again.

How long will the good times last? At least until the end of the month. Qualified home buyers who have signed contracts by April 30 to purchase a home will receive an $8,000 federal tax credit. But it's anyone's guess what will happen after the deadline for the tax credit is past. Last fall, demand for housing tanked after the new home tax credit passed its first expiration date, even though the tax credit was renewed by Congress.

Also, even if buyers keep shopping for homes, the rate of foreclosures is expected to stay high all year. High foreclosures should keep pressure on home prices, as the high demand from home buyers is balanced by the large supply of homes available for sale in foreclosure auctions.

When Bernanke said he saw green shoots in April 2009, he warned that "recovery is not going to happen until the financial markets and the banks are stabilized." So, housing starts are good, but healthy banks are better. Once the new home tax credit expires at the end of the month, we'll know better whether this spring's green shoots will likely give way to May flowers.
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