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Can the U.S. Housing Market Continue this Recovery?

By , Contributing Writer, Money Morning •

The ailing U.S. housing market, the trigger of the Great Recession, is indeed starting to recover - but it'll take years before it's healed.

The Standard & Poor's/Case Shiller Home Price Index released today (Tuesday) revealed that home prices in 20 U.S. cities rose in June from the same period a year ago. It also marked the first such gain since September 2010.

All 20 cities tracked by the index also rose in June from May, the second month in a row in which every city posted month-over-month gains. The most robust one-month gains came from Detroit, Minneapolis, Chicago and Atlanta.

"The combined positive news coming from both monthly and annual rates of change in home prices bode well for the housing market," David Blitzer, chairman of the S&P's index committee said in a statement. "We seem to be witnessing exactly what we need for a sustained recovery: monthly increases coupled with improving annual rates of change."

Helping the housing market rebound are record-low interest rates. Mortgage rates hit historic lows this year, and while they have inched up a tad, they are still at record low levels.

The National Association of Realtors last week reported sales of previously occupied homes climbed 10% in the past year. Builders, seeing an uptick in interest from potential buyers, are growing more confident. The group in June applied for the largest number of building permits in roughly four years.

The news is encouraging, but don't be mistaken: The U.S. housing market is still a far cry from healed or even healthy.

"We seem to have upward momentum and we have confirmatory evidence and like NAHB housing confidence index," said economist and index founder Robert Shiller. "But you know we have lots of clouds on the horizon too."

U.S. Housing Market Recovery: Long Road Ahead

A handful of economists forecast that sales of previously occupied homes will jump 8% this year to some 4.6 million, short of the annual "healthy" sales pace of 5.5 million.

"The price gains are becoming broader. This is certainly a positive step, but we still have a long way to go," Brian Jones, senior U.S. economist at Societe Generale, told Bloomberg News.

Home sales have been stymied by the limited supply of homes on the market. Homeowners, not willing or able to settle for the current depressed price their homes would fetch in today's market, are staying put. And many potential buyers have been shut out of the market because they don't qualify for loans or can't afford the much higher down payments now required.

Although premature to say the U.S. housing market is in a certain recovery, the positive news does have a significant ripple effect - albeit a slow one. Higher home prices will leave fewer homeowners underwater, reduce foreclosures, and push stalling potential buyers to start seriously shopping.

Declining foreclosures and more access to credit, economists say, would further steady the industry, strengthen consumer confidence and boost spending.

Mark Zandi, chief economist of Moody's Analytics, told CNN Money, "Housing is beginning to act as a tailwind for the recovery."

Housing Stocks Building Gains

Following the upward path of housing market price gains are housing stocks.

In June, as housing figures revealed some signs of life in the struggling industry, the collective sector rallied 14% from their low at the month's start and more 31% for the year.

Homes sales data have both builders and buyers more confident, which should translate into more sales, which is good news for stocks in the housing segment.

CNBC compiled a list in late June of some housing stocks that have performed the best year-to-date and stand to continue to benefit if the housing market recovery continues. Most have sustained those gains since and risen further. Following are a few of the best performing names on the roster:

  • KB Home (NYSE: KBH) operates as a homebuilding and financial services company. Shares have risen more than 25% this year.
  • USG Corp (NYSE: USG) engages in the manufacture and distribution of building materials worldwide. Shares are up more than 70% this year.
  • Standard Pacific Corp. (NYSE: SPF) operates as a diversified builder of single family attached and detached homes. Shares have climbed more than 73% year-to-date.
  • The Ryland Group Inc. (NYSE: RYL) engages in the design, construction and sales of homes. It also provides mortgage, title, insurance, escrow and insurance services. The stock has nearly doubled this year.
  • PulteGroup Inc. (NYSE: PHM) is a homebuilding and financial services business that operates primarily in the United States. Shares have gained roughly 55% this year.

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