Housing Recovery Hovers at 50% Mark

Each month, Trulia’s Housing Barometer charts how quickly the housing market is moving back to “normal.”  We summarize three key housing market indicators: construction starts (Census), existing home sales (NAR), and the delinquency-plus-foreclosure rate (LPS First Look). For each indicator, we compare this month’s data to (1) how bad the numbers got at their worst and (2) their pre-bubble “normal” levels.

In January 2013, construction starts slid, while home sales and the delinquency + foreclosure rate both improved slightly relative to December:

Construction starts fell monthly, but were still up sharply year-over-year. Starts were at an 890,000 annualized rate, down 8.5% month-over-month but up 24% year-over-year. The month-over-month decline was relative to a December spike in multifamily housing starts, which tend to be volatile. January starts were at their second-highest level since July 2008, and single-family housing starts were at their highest level since that same month. Furthermore, residential construction employment was up 2.6% year-over-year in January – outpacing employment overall, which rose 1.5%. Construction starts are now 40% of the way back to normal.

Existing home sales edged up. Sales rose slightly to 4.92 million in January from 4.90 million in December. Year-over-year, sales were up 9%. But the mix of sales is shifting from “distressed” sales — foreclosures and short sales — to “conventional” home sales. Excluding distressed sales, conventional home sales were up 29% year-over-year in January. Overall, existing home sales are 66% back to normal.

The delinquency + foreclosure rate improved. After holding nearly steady for three months, the share of mortgages in delinquency or foreclosure fell in January to 10.44%, from 10.61% in December. The January rate is the lowest level since December 2008. The combined delinquency + foreclosure rate is 43% back to normal.

Averaging these three back-to-normal percentages together, the housing market is now 50% of the way back to normal, down from 52% in December. That’s the first setback since June. Cause for alarm? No: the Housing Barometer reached 52% in December thanks to what looks like a temporary spike in multifamily housing starts. Even with this backward step in January, 50% back to normal represents steady progress. But January’s figures are a reminder that housing indicators often have monthly swings, and the longer-term trend is a better guide to the shape of the housing recovery.



WRITTEN BY
Jed Kolko, Chief Economist

Three Reasons Why Housing Inventory is So Low

by Mike Simonsen

There’s no question about it, the operative theme of the 2013 housing market is restricted supply. Ever since the bubble burst in 2006, we’ve been hearing about the dangers of over supply, of the massive “shadow inventory” out there. Yet we’re living in a vastly different reality. There are 40% fewer homes on the market now than there have been during February in the last few years.

Inventory of actively for sale homes. Single Family Homes. Altos 20-city (national) composite. Data as of February 22, 2013. Source: Altos Research

Mid-January typically marks the seasonal low of available housing inventory. The fewest homes are on the market after the holidays. But pretty quickly they start coming on the market to prepare for spring. Inventory gets added until the first week of July, when people start looking forward to the Autumn.

Last week we commented about the rising prices that have resulted from this restricted supply. Imagine what would happen to the price of oil if Saudi Arabia, Russia, The US, China, Iran, and Canada were all offline.  It’s a, ahem, crude analogy, because housing is less a commodity than oil. But the fact is, we’re facing unprecedented few homes available for sale.

Why is that? What happened to all this “Shadow Inventory” that was going to dump on to the market?

You can boil the low-inventory reality down to three primary factors:

Under-Construction

Since 2007, new housing starts have been anemic. The long-term average construction rates are about 1.5MM homes per year. In the last six years, we’ve averaged well under 1MM. And since 2009, the average is closer to 500,000. Meanwhile population and household formation keeps on trucking. The over-construction that happened in the bubble is a distant memory. See the chart to the right. Construction volume under the orange line are “undersupplied” conditions. The homebuilders imploded so profoundly after the bubble, that we haven’t had this few new homes being built since 1959.

Expect this trend to continue for several more years. It’s difficult to ramp up housing production quickly. And we’re a long way below normal.

Inventory of actively for sale homes. Single Family Homes. Altos 20-city (national) composite. Data as of January, 2013. Source Census Bureau via themortgagereports.com

The Reverse Shadow Inventory Dynamic

Rising home prices have led to fewer, not more, existing  homes coming on the market. You might call this, ironically, the “Reverse Shadow Inventory” dynamic.

When the Shadow Inventory meme emerged during the bubble, the bearish argument followed: As soon as home price tick back up, there are going to be millions of people (and banks) who want to unload. Therefore supply will rise and prices will fall again.

In actuality, it seems the psychology has been reversed: As prices have climbed, those who (still) own their underwater homes finally see light at the end of the tunnel. The longer they hold, the closer they are to recovery. Why sell now if you don’t have to? Maybe you’ll make it out alive!

Banks are acting similarly. The owners of underwater mortgages have no incentive to unload quickly. Their assets are appreciating. Furthermore, as home prices increase, fewer and fewer people are at risk of default. The Shadow is shrinking in the noon-day sunshine of rapidly re-inflating home values.

Government Policy

Finally, it is no coincidence that essentially all housing policy, all programs, laws, and incentives have been focused on stimulating demand and restricting supply. The Fed is aggressively keeping interest rates low. HARP, HAMP and related mortgage crisis programs are designed to keep people in their homes. They have been successful. Politically, it’s near impossible to institute a program that might help home buyers. For whatever reason, the bureaucrats are much more fond of home owners. That’s unlikely to change.

We’re in a hangover of short supply after the burst bubble. Low new construction, low incentive for existing homes to sell, and a government that wants people to stay put. Like a good hangover, these are long, slow, painful conditions.  We’ll ease slowly out of the fog in the next few seasonal cycles.