Long-Awaited Housing Recovery Finally Under Way
Even if policy supports are ended, home affordability and shrinking inventory point to a sector on the mend. The broad improvement in the housing indicators in recent months leaves no doubt that the long-awaited housing recovery is finally under way. In fact, homebuilding added solidly to third-quarter economic growth, its first positive contribution in 3 1/2 years.
MP: The top chart above shows the 23.4% annual growth in third quarter Real Private Residential Fixed Investment (data), the biggest quarterly gain since the second quarter of 1986, more than 23 years ago, and the first quarter since the fourth quarter of 2005 of positive growth in homebuilding.
The supply of existing homes in September fell to 7.8 months, down from a peak of 11.3 months in April 2008 and the lowest in 2 1/2 years (see second chart above). Given this year's trends, inventories will drop below seven months by yearend. A level consistently below seven months would indicate a better balance between supply and demand, further bolstering the pricing outlook.
Policy alone cannot explain the 24% gain in existing home sales since January, nor the 22% increase in new-home purchases, the 40% rise in single-family housing starts, and the recent upturn in home prices. The primary driver is historically high affordability. Fixed 30-year mortgage rates are at 5%, a multi-decade low, and prices have plunged a total of 30% since May 2006, based on the Standard & Poor's Case-Shiller Home Price Index. By that price gauge, homes are well undervalued relative to both rents and aftertax income.
MP: The bottom chart above shows the monthly Housing Affordability Index through September, using the data from this last week's report from the National Association of Realtors. Because of falling interest rates over the summer, and slightly lower existing-home prices in September compared to the summer months, September housing affordability rose to 162.7, the highest reading since May.
An affordability index of 162.7 means that a household with median family income of $60,288 has 162.7% of the qualifying income needed ($37,056) to purchase a median-priced existing single-family home of $174,900, financing the purchase at the 5.24% average mortgage rate in September, with a 20% down payment. The September index of 162.7 is almost 38 points above the average affordability index of 124.8 since 1989.
Recent CD posts have provided additional evidence of a real estate recovery taking place in states like Florida (13 straight months of sales gains) and California (15 monthly sales increases).