Tuesday, May 28, 2013

The housing recovery is real

A variety of surveys show that housing prices on average rose 10-14% in the year ended last March. Nominal housing prices are now at a post-recession high, after being relatively flat for the past four years. Over the same period, an index of the stocks of major home builders has risen 245%, housing starts are up 78%, and residential building permits have almost doubled. The conclusion is obvious: the housing market recovery is real and robust.

The two surveys of housing prices shown in the chart above use different methodologies but arrive at similar results: prices are up between 10 and 14% over the past year, and prices are now at a post-recession high. (The Case Shiller index tracks the sale price of the same houses over time, and reports the average price of homes sold, and the Radar Logic index tracks the average cost per square foot of homes sold. For this chart I have used the seasonally adjusted Case Shiller index and the nonseasonally adjusted Radar Logic index.)

Adjusted for inflation, housing prices fell over 40% from their early-2006 high to their early-2012 low, according to this measure of prices in 20 major metropolitan markets. That's a huge downward adjustment—by far the biggest in modern times—but it was necessary to clear the a very large excess housing inventory.

The chart above covers a longer time span, but only 10 major metropolitan markets. The decline in inflation-adjusted housing prices from 2006 to 2012 was almost identical to the decline in the prior chart. Prices today are about 17% higher in inflation-adjusted terms than they were in 1989. However, 30-yr fixed mortgage rates were over 9% back then, whereas they are only 3.75% today. Thus, the monthly cost of buying the same house today is about 60% less than it was in 1989. Housing has never been more affordable for the average family than it is today, as shown in the second chart above.

Home builders' stock prices are up 245% from their recession-era lows, as the above chart shows.

This index of homebuilders' market sentiment (builder perceptions of current single-family home sales and sales expectations for the next six months) has improved dramatically over the past year or so, but it is still under 50, the point at which just as many builders rate conditions as "good" as do "poor." In other words, even though there has been a dramatic improvement in the housing market, there is no sign of excessive optimism among major home builders.

Consumer confidence has likewise improved dramatically from its recession lows, but confidence is still at levels that were consistent with prior recessions. We are still far from reaching conditions which might be considered "optimistic." Skepticism and caution are still widespread, and that means that there is plenty of room for the housing market to improve in coming years.


Gloeschi said...

"housing affordability index" LOL. Straight from the hymn sheet of the NAR. Well done!

According to this index, houses were never 'unaffordable', not even at the height of the bubble. Blogs who spread such nonsense risk being suspected of being paid advertisers for the housing industry.

"The recovery is real" => how real would it be without ZIRP? Fed targets wealth effect by inflating house and stock prices (again) with the hope consumers "feel" richer and spend more, taking on more debt.

Unfortunately, only debt is real - and inflated assets will revert back to mean. The lessons of the last housing bubble sadly are already forgotten.

Anonymous said...

Unemployment situation improving, inflation low, positively sloped yield curve, residential investment improving, stock market and stock market multiples increasing, consumer confidence improving but not at previous levels indicative of a market top, swap spreads normal. Stock and housing markets supporting a positive wealth effect. Are retail sales and income growth sufficient? M2 ready for consumption.

The ten year treasury is bumping up. This could be (or of course may not be :)) where interest rates start rising due to a strengthening economy or expectations of a strengthening economy. And also expectations of FED "tightening."

Absent negative shocks exceeding what may still be priced into the market it appears we may keep improving.

Mornigstars Bob Johnson and Calculated Risk seems to think auto sales are going to slow and possibly peak in the medium term. Bob Johnson also really emphasizes inflation YOY and three month moving average at or above 4% to make recession calls. So with inflation low but inflation expectations picking up a little we're currently good on the inflation front.

Benjamin Cole said...

The doomsters were wrong. Housing came back. Even commercial real estate is coming bad.