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).
5 Comments:
So how does this housing recovery jive with this CNN piece?
Despite signs of broader economic recovery, number of foreclosure filings hit a record high in the third quarter - a sign the plague is still spreading
By Les Christie, CNNMoney.com staff writer
Last Updated: October 15, 2009: 7:34 AM ET
I think the uptick in the Housing Affordability Index shows what happens when government starts tossing around $8,000 to new home buyers. I've seen the chart going back to 1900 and housing still seems way over priced.
I welcome the housing recovery on one level, but on another level, in the United States we over-invest in housing, due to the homeowner mortgage interest tax deduction (nanny-statism) and various other federal homeowner help programs, all of which should be eliminated.
I realize housing regs and permits etc are a local issue, but if you ever build a house in Thailand vs. the USA, you will really wonder if the panoply of local regs is worth it.
In Thailand, houses are sometimes built without a single blueprint or permit (mine was). Hand sketches by the owner (my wife) are enough.
This means that in Thailand, certain traditional forms and construction techniques are used, which are proven to work.
The house is stronger and less worrisome than American houses, and very suitable for hot and wet climate.
In the USA we also have extremely wasteful rural housing programs run through the Department of Agriculture, actually encouraging people to live out in the hinterlands, where they then lobby for extensive range of subsidies in order to make life comfortable for them. Through the Republican Party, they are highly successful in this regard. More money going into housing from taxpayer pocketbooks, to promote an economically unsustainable, knock-kneed, socialist rural-pinko paradise.
So in reverting to the mean in affordability, which will move the most - price increases, rate increases, or income declines?
My guess is rates will be the one. Now that people have to put actual money down, it limits the price growth. But staring at trillion dollar deficits for at least the next 4 years, it's hard to believe Treasuries are going to keep yielding so little. There's a limited amount of natural buyers for those and they're not increasing demand that fast.
I hate being part of the Cassandra Choir but if one continues to look at what passes for news this supposed housing recovery is apparently hitting some serious potholes on the road to recovery...
From USAToday: More walk away from homes, mortgages
The money line for me at least: 'The mortgage unit of Citigroup says one in five borrowers who defaults does so willingly, even though they're able to pay the mortgage. "It's a very large number, and it's a very, very significant risk to the housing recovery," says Sanjiv Das, CEO of CitiMortgage, adding that new government programs to curb strategic defaults may be needed'...
Again from USAToday: Interactive Map of Foreclosures
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