Housing: A Return to Normalcy

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Aug 19, 2015 4:19:10 PM

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housingThe great financial crisis of 2008 was, of course, ultimately a financial crisis, but the proximate cause was housing. As of the mid-2000s, you may remember, the general consensus was that housing prices couldn’t go down nationally because, well, it had never happened before. 

There’s no doubt that the housing market broke completely during the crisis and has been recovering ever since. I’ve talked a great deal about employment and how it has largely recovered, but I haven’t taken a detailed look at housing, which is also mostly back to normal, as several recent reports have made clear.

Homebuilding moves back into a boom

The homebuilding industry lives or dies by new demand. If people aren’t willing and able to buy new homes, homebuilders don’t have a business. This week, the National Association of Home Builders survey rose to 61, the highest level since 2005. Historically, levels above 60 have only been seen in boom times: in 1986, in the early and late 1990s, and from 2002 to 2005. From an industry perspective, we’re moving back into a boom.

Looking at housing supply and demand, the typical way to express the balance is to compare the availability of homes with the average sales rate. Here, we see a supply level of less than five months, near the lows of the mid-1990s and 2000s—again signaling boom times.

Clearly, the industry is optimistic, and supply and demand are tight. The conditions are in place for continued recovery, but have things gone too far? Is this a false recovery only bound to collapse again?

A closer look at supply and demand

Start rate. Delving deeper into supply, let’s look at the start rate for new homes. Per this week’s reports, housing starts recovered in July to above 1.2 million, the highest rate since October 2007. At this rate, excess supply won’t be a problem for some time, and construction still has room to expand, which will continue to support the overall economy. The same conclusions apply to building permits.

Affordability. Now for demand. Though down from its peak due to a combination of rising home prices and higher interest rates, affordability remains well above the levels of the 1990s and 2000s. From an affordability standpoint, conditions remain very supportive of strong growth.

Household formation. In this area, we see a strong uptick after very weak results in recent years, to a level consistent with—again—the 1990s and mid-2000s. This may well be in response to much faster job growth in the primary first-time buyer demographic (25 to 34 years old).

Mortgage debt. Finally, mortgage debt has started climbing again for the first time since late 2008. In a healthy housing market, with rising values and a burgeoning population, we should see growing mortgage debt, and for the first time in years, we do.

All in all, housing appears healthy

Any way you look at it, the housing market has moved back to normal territory. We’re not in boom times again—and we don’t want to be—but a balanced increase in demand, in prices, in the availability of mortgages, and in household formation has led back to normalcy, where we wanted to be all along.

One more piece of the recovery is dropping into place.

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