The latest Case-Shiller index supports the notion that the housing market is recovering, but it's not time to break out the champagne yet.
The closely-watched S&P Case-Shiller index, released Tuesday, continues to point to a recovery in the housing market. There's every reason to hope it might pull the economy, and small business owners with it, out of a long slump. But when?
The index, which reports on housing prices in the biggest urban areas, found home prices rose a seasonally-adjusted 4.5 percent in its 10-city index and 5.5 percent in its 20-city index for the 12 months through November. Prices rose in 19 of the 20 cities the index studies. The biggest jump--23 percent--was in Phoenix. New York was the only city where home prices fell, 1.4 percent. Month-over-month, both the 10- and 20-city indexes were down slightly.
Fast growth small business owners involved in both residential and commercial building are warily upbeat.
"Traffic at the start of this year was good, sales numbers are good--it's not off the charts, but I'd consider it a recovery," says Gordon Jones, chief executive of Edge Homes in Orem, Utah, a residential builder. Utah does not have a city on the index, but cities in neighboring states like Arizona and Nevada were among the biggest gainers in the Case-Shiller index this month.
Edge Homes, which was number 94 on the Inc. 500 list for 2012, has had its share of tough times. It launched in the middle of the financial crisis in 2009. Since then, the trend line for sales has resembled a hockey stick.
In 2009, the company closed 76 home sales. The following year, it notched only 20 more. Last year, however, Edge sold 335 units. It expects to sell 550 in 2013. The company has 47 employees, and added 20 in the last 12 months to keep up with the orders.
"If you have the right product at the price in the right location, it's a good market," Jones says.
Housing prices and construction are two of the most important indicators of an economic recovery, particularly one following on the heels of a real estate-fueled financial disaster, experts say. Though residential construction only contributes about 2.5 percent to the gross domestic product, it added 10 percent to economic growth between the second and third quarters of 2012, says David Blitzer, managing director and chairman of the index committee for S&P Dow Jones Indices.
Blitzer cautions that the number of housing starts, an indicator of economic strength, is running at about 980,000 annually. That's down from an average 1.25 million for the past 25 years. Even so, since mid-2012, housing has had a positive impact on the economy, Blitzer says.
"Small businesses that are in any way tied to housing and construction home will clearly be benefitting," Blitzer says. Another key small business benefit: Many entrepreneurs also collateralize their houses to obtain business loans, and increasing values will benefit them too.
It's important not to place too much emphasis on one index, however. Case-Shiller tends to focus on the wealthiest areas of the country. To get a more balanced view, it helps to look at indexes that include rural areas, like the House Price Index, produced by the Federal Housing Finance Authority, and a broader base such as the one National Association of Realtors surveys.
Those also paint a mostly optimistic picture. For November, the HPI increased 0.6 percent compared with October. And for the 12 months ended in November, housing prices increased 5.6 percent, which is comparable to Case-Shiller's report for December.
Similarly, NAR said that the median existing home sales price rose 11.5 percent in December to $180,800, compared to December 2011. Prices jumped 6.3 percent overall in 2012, the biggest gain since 2005.
However, NAR's pending home sale index, which came out on Monday and is more forward looking, fell 4.3 percent to 101.7. That's still nearly 7 percent higher than December of 2011, NAR reports.
"We've been in recovery since the end of 2009, but it depends on the definition of what recovery is. The GDP is growing, but that does not mean everything is wonderful," says John Dunham, managing partner of John Dunham & Associates, a small business economic consultancy in New York.
And Robert J. Shiller, one of the creators of the index, in a New York Times column on Sunday, said the recovery is murky at best, influenced by unknown factors causing housing prices to increase in the short run.
Tyson Grace, who founded residential and commercial refurbishment company Graybach, with his partner Peter Suvach in 2008, is mostly optimistic. Graybach is on track to increase revenues by at least 50 percent this year, and just landed its biggest contract ever, for $2 million, Grace says.
The Cincinnati company has managed to survive and thrive by keeping its operations, which includes 12 employees, lean, and it plans to continue in that mode just in case.
"We started when market was as bad as it could be," Grace says. "We're at a unique advantage because we don’t know any better, so when people talk about how bad it is, this is the market we have always been in."
Graybach, which was 107th on the Inc. 500 for 2012, has revenues of $4 million.
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