Dissecting the Housing Turnaround
Everyone agrees that the housing market has made a dramatic turnaround over the past 16 months. All segments of the industry have enjoyed a significant resurgence in activity and the general mood of the entire marketplace seems both positive about the near turn and optimistic towards longer-term recovery. However, there is also an underlying current of cautiousness that many sense even though reluctant to outwardly verbalize their trepidation for fear of sounding too pessimistic in the midst of this housing euphoria. It’s like when my daughter’s out-of-state college sent notification of her financial aid package nearly doubling this year from the previous year. We were too afraid to confront them to learn the details for fear we might expose some sort of an error in the system. Rather than getting a full understanding of the situation we accepted our good fortune without question and just went about our business. I think the building industry may be reacting to the recovery in a somewhat similar manner in that we are all so giddy (and busy) managing the resurrection of our business that we may not be paying close enough attention to the dynamics behind them. In this two-part article, we will dissect the housing turnaround positives as well as throw up a few caution flags on this fast track that should be considered to make sure we are making an objective, comprehensive read on what has transpired during this whirlwind recovery period.
The health of the housing industry is essentially gauged by the numbers. And, you know what they say...numbers never lie. The most revered housing statistic reported is certainly the number of housing starts in the U.S. This tracks when a privately-owned housing unit’s excavation begins and includes single as well as multi-family structures. The data is compiled into a seasonally adjusted annual rate that is reported each month. Sandwiching this stat is both the housing sales figures on one side and number of new permits on the other, all of which gives a great snapshot of the overall heartbeat of the housing industry. For this article we will concentrate on the housing starts data. Reports lag activity generally about 45 days and are often adjusted a month later to reflect greater accuracy. The most recent NAHB report is from Augusts' housing activity. U.S. housing starts rose .9 percent over the previous month to a seasonally adjusted annual rate (SAAR) of 891,000 units. July’s starts were adjusted down to 883,000 from the previously reported 896,000 units. There was some disappointment with this performance as economists had expected groundbreaking to rise above the 917,000 unit rate in August but the volatile multi-family segment tumbled 11.1 percent to a unit rate of 263,000. Single family homes, the largest segment of the market, actually surged 7 percent to a level of 628,000 units. Percentage of increase improves significantly when comparing August 2013 starts to this time last year. Starts were up over 19 percent from 2012 with permits up 22 percent and new home sales up 13 percent over last August.
For some historical perspective, consider that since 1959 the number of housing starts has only dipped below one-million units on six separate occasions and only one period prior to the Great Recession did it last longer than a few months. The longest dip below a million starts previously had been for 9 months from August 1981 through April 1982. The housing crash that we are currently trying to climb out of was of historic proportion. Starts receded below one million in July of 2008 and dropped to 478,000 in April 2009. It took the next 47 months to finally climb above the million unit mark and that was only for one month, March 2013. We have since dipped below the threshold and not eclipsed the million starts mark since. Also keep in mind that the crash actually started in January of 2006 when starts hit 2,273,000. And to give you a sense of how far things need to go to get back to normal, consider this: builders have started an average of 1.5 million homes per year since 1959. Yes, we have seen sustained strengthening in the housing market; a market that has been a major drag on America’s economy since this recession officially hit in 2007, but it is still important not to let the euphoria over the recovery obscure the realities of the market. Like all economic booms this one carries the instruments of its own destruction.
U.S. home prices continue to bounce back, up 18.4 percent in real, inflation-corrected terms over the last 16 months. And, while there is some concern that price growth has been moderating a bit over the last few months it is critical that home values continue to recover after the massive housing equity collapse if the housing market expects to rebound going forward. A combination of pent-up demand for new homes, low borrowing costs, and extremely low home inventories have driven up home prices. Still, it’s hard to generalize about national home price data when the market is so uneven across markets. A closer look at a map reveals that the markets that have shown the most resurgence is taking place where the housing bubble had swelled and burst midway through the last decade, namely Florida, Atlanta, Phoenix, Las Vegas, and California. Many of those markets saw prices fall close to 50 percent from 2006 to 2011. So, even when those markets show impressive gains of 25 percent or more, (which skews the national data), while certainly heartening, that information should be tempered with a dose of reality. Indeed, of the 20 hottest housing markets in America, 17 are west of the Rockies and 12 are in California alone.
Speaking of a housing bubble, I ran across some very interesting analysis by Mike Patton, an economic advisor, about the relationship between home prices and population growth. In the chart below, notice how home prices (blue line) rose in relation to total U.S. population (green line). Around 2003, the gap began to widen as a greater percentage of Americans became homeowners through a combination of Government programs like the Affordable Housing Act, lax mortgage requirements and artificially low interest rates. And, as we’ve learned, whenever the Federal Government gets involved in the “free market,” results can be disastrous. Basic economics dictates that higher demand begets higher prices. Notice how home prices began to rise faster than the population, peaking in early 2006, then crashing mightily. The point on the graph where home prices were the farthest above the population is a classic example of what a bubble looks like. There is also an additional statistic that tells the housing bubble story more clearly. It is the relationship between median home prices and median income. For decades prior to the housing bubble, the ratio between median home prices and median income hovered around 3:1. In other words, if the median home price was $120,000, median income was $40,000, a ratio of three to one. By early 2007, because home prices had increased much faster than incomes, this ratio expanded to 5:1 and was the strongest signal that a housing bubble was present.
Rebounding housing prices have certainly given consumers more confidence as is evident in the Consumer Confidence Index elevating to its highest level in more than five years. But, there are many components that impact consumer confidence and ultimately, the housing market. Next week in part II of our series, we will dissect additional key factors that influence housing and gauge their current status, plus tune into the dysfunction that has become our nation’s government to see if they feel compelled to squeeze every ounce of consumer confidence out of the marketplace with their political wrangling.