Economists say the housing market is starting to heal, but too many people aren't aware of it because they're judging a housing recovery on the wrong sign: What’s happening with home prices.

Paul Dales at Capital Economics says higher prices won’t be the sign that the housing market is on the mend — that can be a lagging indicator — but rather an increase in overall home sales. And that's showing signs of improvement: Existing home sales in 2011 rose to 4.26 million compared to 4.19 million in 2010. In the last six months alone, home sales have increased 13 percent.

As a recent article at Fortune points out, “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.”

Source: “The One Number to Watch for a Housing Recovery,” Fortune (March 20, 2012)

Smaller homes near restaurants and retail may be the most in demand as the housing market crawls out of its slump, housing experts say.

McMansions--which are at least 2,600 square feet--were popular during the years of the housing boom, but now are only desired by 18 percent of households today and is expected to drop more, according to a survey by Trulia.

"Baby boomers are trading down. They don't need the McMansion, and they don't want to drive as much," Jed Kolko, Trulia’s chief economist, told Money Magazine.

Source: “A Smaller House Will Make a Big Difference,” Money Magazine (Nov. 14, 2011)

By Robert Freedman, senior editor, REALTOR® Magazine

A piece in the Wall Street Journal yesterday took issue with a recent Time cover story calling into question some of our most cherished beliefs about homeownership. Much of what the Journal talks about isn’t new. In fact, it recites benefits of homeownership that you already know better than anyone. But in pulling them together in the way it does, it makes you realize just how compelling homeownership is from just about every standpoint. If you haven’t seen the piece, by Brett Arends, here’s a thumbnail sketch of its 10 points:

Why is now a great time to buy?

1. You can get a good deal. Prices are down 30 percent on average. They’re at a level that makes sense for people’s income.

2. Mortgages are cheap. At 4.3 percent on average for a 30-year fixed-rate mortgage, your costs to own are down by a fifth from two years ago.

3. You can save on taxes. When you add up the deductions for mortgage interest and others, the cost of owning can drop below renting for a comparable place.

4. It’ll be yours. The one benefit to owning that never changes is that you can paint your walls orange if you want (generally speaking; there might be some community restrictions). How many landlords will let you do that?

5. You can get a better home. In some markets, it’s simply the case that the nicest places are for-sale homes and condos.

6. It offers some inflation protection. Historically, appreciation over time outpaces inflation.

7. It’s risk capital. If the economy picks up, you stand to benefit from that, even if you’re goal is just to have a nice place to live.

8. It’s forced savings. A part of your payment each month goes to equity.

9. There is a lot to choose from. There are some 4 million homes available today, about a year’s supply. Now’s the time to find something you like and get it.

10. Sooner or later the market will clear. The U.S. is expected to grow by another 100 million people in 40 years. They have to live somewhere. Demand will eventually outpace supply.

Read the story yourself.

From a price perspective, the latest news is good for the housing market. Home prices for the second quarter are up on a year-over-year basis in almost two-thirds of the big metro areas that the National Association of REALTORS® tracks, and in almost 10 percent of markets, the gains were in the double digits. The national median home price at the end of June was $176,900, about 1.5 percent higher than the same time last year.

Although the clear firming up of prices is positive, the question you’re no doubt asking is: What happens going forward? The second-quarter data reflects the impact of the home buyer tax credit. When it comes out, the third-quarter data won’t have the stimulus effect of that credit. So, what the numbers look like at the end of September will be illuminating.

Based on his most recent comments, NAR Chief Economist Lawrence Yun believes prices should hold steady, with no swings either up or down, for the near term even though the tax credit is gone and the economy isn’t being cooperative. The reason for the predicted stability is the way prices change over time. Price shifts tend to reflect longer-term trends, and the long-term trend for the past year or so has been stabilization.

As I interpret his point, there would have to be a significant shift in the economy for big changes to show up in broad home price trends. So, if the economy remains sluggish but doesn’t lurch downward, prices could remain relatively stable (with small up or down movement on a month-to-month basis) for the next several months. But if the economy remains sluggish until, say, the end of the year and beyond, then prices could be affected.

Of course, you have to approach national price data with a realistic eye. Last year, distressed sales comprised almost 40 percent of sales, compared to a little over 30 percent this year through the second quarter. That means some of the price improvement could be the result of the different mix of properties, not price appreciation.

The bottom line, though, is that prices so far are stable. That’s good for consumer confidence. When the stable prices are combined with historically low rates (about 4.9 percent on average right now for long-term, fixed-rate financing), you have good conditions for the market. For that reason, housing prospects are really hinging on jobs. Tepid job growth is the main impediment to rising consumer confidence.

Access NAR’s latest quarterly price data for yourself: Metro Area Median Prices.

Source: http://speakingofrealestate.blogs.realtor.org/2010/08/11/home-price/#more-3208