Housing recovery far from normal
WASHINGTON — By most economic measures, the moribund housing sector seems to have turned a corner and is now firmly in recovery. For many homeowners, however, it may still feel like a statistical rebound because an improving housing sector is not the same as a healthy one.
Economists are broadly in agreement that housing is no longer weighing against economic growth and actually will be a positive contributor in 2013.
That's supported by most measurements of the housing sector, be they starts of single-family homes, sales of existing homes, rising median home prices or shrinking foreclosures as a percentage of total sales.
“The current forecast is for 5 million existing homes and 500,000 new single-family (housing starts). That's a pretty healthy growth in existing sales of about 8.5 percent,” said Danielle Hale, director of housing statistics for the National Association of Realtors.
Sounds good, but there is a sobering footnote.
“They're coming off of extraordinarily low levels,” cautioned Hale. “That's still a below-trend growth rate. Obviously, if the economy improves beyond what's forecast, then the housing position will be better.”
After several years of false projections that housing had hit bottom, it appears that the sector truly is in recovery mode.
“I think housing has clearly bottomed. But I think there is clearing skies, not blue skies,” said Mark Vitner, senior economist with Wells Fargo Securities in Charlotte, N.C. “It's going to be years for housing to get back to what's considered normal. But we're going to see improvement along the way. We have a great deal of improvement in virtually every metric that matters to housing.”
Pending home sales, although declining in December, have stayed above year-ago averages for 20 consecutive months, according to data released last week by the National Association of Realtors.
The group reported earlier in January that housing was at record affordability rates in 2012, for the second straight year. “Distressed” sales, which in 2011 represented 32 percent of all home sales, fell to 24 percent at the end of last year.
“It is robust; we are starting on a recovery; we don't think there is going to be a second housing market downturn for the whole country,” said Andres Carbacho-Burgos, an economist specializing in housing for forecaster Moody's Analytics in West Chester. “We believe that the housing sector is no longer a drag on economic growth. That's the good news. The bad news, if you can call it that, is that the housing recovery is not going to be spectacular.”
An improving housing market is important for economic growth. For much of 2005 and 2006, investment in residential housing ranged between 5.5 percent and 6.3 percent of the nation's gross domestic product, the broadest measure of the sale of goods and services. It plunged during the financial crisis of 2008, dropping to just 2.2 percent of GDP for most of 2011 and climbing to just 2.6 percent of GDP in the final three months of 2012.
Whether it's a good or a bad market depends on perspective. For the first 11 months of 2012, a housing affordability index compiled by the realtors' group showed record levels, and that's great for buyers. The index measures the relationship between median home prices, median family income and average mortgage rates.
And prices are going up, which on the face of it would seem good news for sellers. The latest read from the closely followed Case-Shiller Indices, which track metropolitan home prices in 10-city and 20-city composites, was positive.
Data released last week that span a 12-month period ending Nov. 30 showed that prices rose 4.5 percent on the 10-city index and 5.5 percent on the 20-city index. Some of the hardest-hit cities in the country are rebounding, with Phoenix leading the nation with prices rising 22.8 percent, Las Vegas at 10 percent and Miami at 9.9 percent.
The creator of the indices, Yale University economist Robert Shiller, isn't ready to declare victory for the housing sector.
“The short-term indicators are up now; it definitely looks better, but we saw that in 2009,” he said, referring to a period when homebuyer tax credits helped spur sales, but home buying faded when the tax credits were removed.
In the hard-hit cities, today's rising prices reflect that distress sales are now a smaller percentage of total sales. But in more stable areas, the higher prices partly reflect a shrinking inventory of homes for sale. This is because many homeowners who'd like to sell their homes still owe more than they're worth, and thus keep them off the market.
The National Association of Realtors reports that December 2012 inventory was almost 22 percent below December 2011. With fewer homes on the market, some areas are experiencing bidding wars reminiscent of the go-go days of the housing boom in 2005 and 2006.
The tight inventories likely will translate into higher prices for homes in 2013. By historical standards, buying a home will still be cheap — but not as cheap as in 2011 and 2012.
In parts of the nation where the housing crisis was less damaging, rising home prices will help sellers this year. According to statistics from the National Association of Realtors, the median home price for existing homes rose 11.5 percent in 2012 to $180,800.
New-home construction remains the most optimistic segment of the housing sector. The most recent read from the National Association of Homebuilders, for December, found that permits to build new homes were at their highest level — an annual rate of 903,000 — since July 2008. Similarly, permits for single-family homes were at their highest annualized rate since June 2008, just months before the U.S. financial system nearly melted down.
By historical standards, however, the 780,000 homes actively under construction in 2012 was awful, the fourth-lowest total since 1945, according to Patrick Newport, an economist with forecaster IHS Global Insight.
Nonetheless, home starts have risen three years in a row, with each year leaving the housing crisis farther away in the rear-view mirror.