Housing Market Closes In on Normal

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Nov 21, 2014 11:52:00 AM

and tagged Commentary

Leave a comment

HousingAs the industry that led us to disaster in 2008, housing has had a long road back. You can make a good argument that, until the housing market returns to normal, the economy hasn’t really recovered. While not a defining indicator, a healthy housing market is a necessary condition for recovery.

I last looked at housing in June, so it’s time for an update. The news is actually quite good, despite some of the headlines recently. 

A healthy moderation in price growth

Looking at the chart below, which shows annual changes in price growth, you can see where the negative headlines come from. Annual growth in prices has dropped considerably from the 10+-percent level of the past couple of years and now hovers around 5 percent.

housing_1-1

A slowdown, right?

Well, yes, but a predictable one. Back in June, I noted that price growth could be expected to slow to about 5 percent per year (per the chart below), which is exactly what we’re seeing.

 housing_2-1

The question is whether that moderation is a bad thing or a good thing. I’d say it’s the latter. There’s a word for when something appreciates at a double-digit rate for years on end: bubble. Look at the sustained appreciation in housing through the 2000s in the first chart, and think about where that took us. Price growth had to slow down, and the fact that it did is healthy.

Supply increases, demand rises

The next question is, What caused the moderation? Is it lack of demand (bad) or increasing supply (good)? The numbers seem to suggest it’s increasing supply. In October, single-family housing starts were up 4.2 percent—the best showing since November of last year—while permits hit their highest level since late 2008.

At the same time, homebuilding companies are reporting much higher sales revenues, with Lennar’s revenue up 25 percent and D.R. Horton’s up by 33 percent. Demand is actually rising, not falling.

This is important not only for the housing sector but for the economy as a whole, as much of the growth in homebuilding has been in multi-family housing. The recovery of single-family homebuilders says that the broader housing market is hitting its stride as well.

So, have we dug ourselves out of the hole?

By and large, we have.

  • Mortgage delinquency rates have dropped below 6 percent for the first time since late 2007. We’re not yet back to the levels of the mid-2000s, but we’re moving in the right direction.
  • Foreclosures have fallen to the lowest levels since the middle of 2008, showing substantial improvement, but they’re still higher than normal. While we're clearly not out of the hole yet, we’re filling it in.

Overall, the housing market looks strong going forward—normal, in fact—and the post-crisis healing is well advanced. As with many other areas of the economy (employment, business spending, interest rates), you could reasonably say that we’re within about 12 months of being back to normal.

Unlike a boom, normal is sustainable over time. Normal is what we’ve been aspiring to over the last five years, and it seems we're finally getting there.

Upcoming Appearances

Tune into Bloomberg Radio's Bloomberg Baystate Business Show on October 24 at 4:30 PM ET to hear Brad talk about the markets. Check your local listings for availability. 

 

5 Ways to Affiliate
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Subscribe via E-mail

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®