The argument that housing isn't in full-recovery mode continues to weaken. Look no further than the sentiment of those whose living depends on bringing new supply to market – the home builders.

Confidence among builders has surged through 2012. A year ago, the builders were deep in the doldrums; their sentiment index was down to a very low 15. Today that index stands at 40. That's a remarkable change in sentiment. Optimism is no longer the exception; it's the rule.

harrisburg pa real estateThe upward trend in housing starts is no doubt a contributing factor to rising optimism. Since August 2011, starts have been on a steady upward trajectory. For August 2012, the trend continued to move higher, with starts advancing 2.3% to 750,000 annualized units. Single-family units paced the gain, improving 4.5%.

To be sure, 2.3% advance isn't a spectacular, but slow and steady wins the race. Slow and steady also produces substantial advances over time. A year ago, starts were at 600,000 annualized units. Today, the pace in starts is up 25%.

Sales of existing homes are also moving in the right direction, though the pace is a bit more volatile. For August, existing home sales improved 7.8% – posting the largest percentage gain in over a year – to an annual rate of 4.82 million units. The higher sales pace, in turned, tightened inventory to a 6.1-months supply.

Existing home sales were helped by a slight drop in prices in some markets, which dropped the national median home sales price 0.2% to $187,400. Looking at the longer-term price trend, the national median home price is still up 9.5% year over year.

At this point, the best course of action is to let the market recover on its own. The chart below reveals what can happen when good intentions interfere. The spikes in existing home sales that occurred in November 2009 and May 2010 were a reaction to the impending expiration of the federal home tax credits. After November 2009 and May 2010, sales fell off a cliff. Future demand was simply pulled into the present, thus leaving a future void.

Around September 2011, a slow, slightly volatile, uptrend formed. The good news is that the trend that formed in 2011 is genuine and sustainable.

The trend in mortgage rates is less genuine, because the Federal Reserve has openly influenced the mortgage lending market. This week, mortgage rates did ease a couple basis points across most product offerings. Such a minor decrease suggests that rates really don't want to go much lower.

Activity in the 10-year Treasury note also points to a rate bottom. When the Federal Reserve announced it would continue to buy mortgage-backed securities and Treasury securities last Thursday, the yield on the 10-year Treasury note actually increased (since then it's been moving marginally lower).

Given the Fed's strategy to add $40 billion to the base money supply monthly, investor concerns could be shifting toward consumer price inflation and away from slow economic growth. If inflation becomes a front-burner issue, interest rates will be very hard pressed to go lower.

Courtesy of Jessica Regan.

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