Prudent Portfolio: Housing Recovery Promises to Be a Boon for the Entire Economy

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By Kevin Peters

Kevin Peters
Kevin Peters

There is more light at the end of the nation’s economic tunnel as home prices increased by more than 12 percent in May, according to published reports.

Home values, of course, are an important barometer of consumer wealth and home construction is a significant portion of the U.S. economy. Both of those elements had taken major hits in recent years.

The average home value (as measured by the S&P/Case-Shiller 10-City Composite Home Price Index) shrank 33 percent from 2006 to 2009. But since those difficult days, home prices have begun to recover. The 12 percent increase in May was the largest gain since March 2006. Overall, home price indexes cover 20 metropolitan real estate markets around the United States. All 20 of those markets showed solid gains from the previous month as well as from May 2012.

With home prices rising, construction activity is also showing signs of recovery. Housing starts are now up solidly year over year, supporting a solid growth trajectory. In May, according to the U.S. Department of Commerce, home starts rose 6.8 percent to a seasonally adjusted annual rate of 914,000. More importantly, new housing permits, a leading indicator for future construction, have been rebounding even more strongly. Builders sought more permits to build single-family homes, which represent about two-thirds of the market. In May, the seasonally adjusted annual rate jumped by 1.3 percent to 622,000—the highest since May 2008—another sign that construction will increase further in the coming months.

Demand for new homes has picked up. Sales of new U.S. homes rose in June to the highest level in five years, pointing to gains in residential construction that will support the economic expansion in the second half of the year. Sales hit an annualized rate of 497,000 homes, the highest level since May 2008, according to the Commerce Department.

Meanwhile, the economy’s overall growth is slow; some news accounts have called it tepid. That suggests that the Federal Reserve will keep its easy money policy in place for some time to come– good news for investors as these policies will continue to pump $85 billion a month into the marketplace through its bond purchases. There are significant implications in this turnaround for investors as well as homeowners.

A number of industries stand to benefit from a housing recovery and that should have a mushrooming effect throughout several sectors of the U.S. economy. Homebuilders themselves are not the only business actors who stand to gain from a turnaround.

Some of the industries worth consideration anew are probably obvious: construction materials and wood products companies, for example. However, home furnishing and consumer electronics retailers tend to benefit from increased real estate activity. Further down the road, so do certain manufacturers. How many people move into a new home and quickly buy new refrigerators, dishwashers and other large appliances?

Couple that with increased consumer confidence, investors finally have reason for some optimism. Results of a recent survey of consumers conducted by the University of Michigan’s Institute for Social Research showed consumer confidence in June reached its highest level in six years, the third consecutive month consumer confidence has been higher than the previous month. Increased confidence means consumers are a bit more likely to spend their dollars. And that will just be more fuel to the economic recovery fires.

Kevin Peters is a managing director and financial advisor with Morgan Stanley Wealth Management in Purchase. He can be reached at 914-225-8451.

The information contained in this interview is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates Morgan Stanley Smith Barney, LLC, Member SIPC.




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