Long-Awaited Housing Recovery Is Finally Underway

This BusinessWeek article makes the case that:

Even if policy supports are ended, home affordability and shrinking inventory point to a sector on the mend. The broad improvement in the housing indicators in recent months leaves no doubt that the long-awaited housing recovery is finally under way. In fact, homebuilding added solidly to third-quarter economic growth, its first positive contribution in 3 1/2 years.

MP: The top chart above shows the 23.4% annual growth in third quarter Real Private Residential Fixed Investment (data), the biggest quarterly gain since the second quarter of 1986, more than 23 years ago, and the first quarter since the fourth quarter of 2005 of positive growth in homebuilding.

The supply of existing homes in September fell to 7.8 months, down from a peak of 11.3 months in April 2008 and the lowest in 2 1/2 years (see second chart above). Given this year's trends, inventories will drop below seven months by yearend. A level consistently below seven months would indicate a better balance between supply and demand, further bolstering the pricing outlook.

Policy alone cannot explain the 24% gain in existing home sales since January, nor the 22% increase in new-home purchases, the 40% rise in single-family housing starts, and the recent upturn in home prices. The primary driver is historically high affordability. Fixed 30-year mortgage rates are at 5%, a multi-decade low, and prices have plunged a total of 30% since May 2006, based on the Standard & Poor's Case-Shiller Home Price Index. By that price gauge, homes are well undervalued relative to both rents and aftertax income.

MP: The bottom chart above shows the monthly Housing Affordability Index through September, using the data from this last week's report from the National Association of Realtors. Because of falling interest rates over the summer, and slightly lower existing-home prices in September compared to the summer months, September housing affordability rose to 162.7, the highest reading since May.

An affordability index of 162.7 means that a household with median family income of $60,288 has 162.7% of the qualifying income needed ($37,056) to purchase a median-priced existing single-family home of $174,900, financing the purchase at the 5.24% average mortgage rate in September, with a 20% down payment. The September index of 162.7 is almost 38 points above the average affordability index of 124.8 since 1989.

Recent CD posts have provided additional evidence of a real estate recovery taking place in states like Florida (13 straight months of sales gains) and California (15 monthly sales increases).

Comments

[Gary A:]

I have a real problem with the long awaited housing recovery success. First, most low end folks are getting in to property no money down with the tax credit. Take it away and you have people with no money to put down.

Supply of homes is a chart that is laughable. The shadow inventory is real. The option arm and alt a and prime real estate is being abandoned in record numbers and it will get worse.

I want whatever it is that housing bulls are smoking to help me feel better, but with those headwinds, I can't really get behind this voodoo economics.

Nov 02 01:16 PM

[Russ Wetherill:]

Recovery Problem #1: Historically low interest rates will eventually rise making homes less affordable.

Recovery Problem #2: Tax credits will expire making homes less affordable.

Recovery Problem #3: Unemployment is rising making homes less affordable to those without jobs.

Recovery Problem #4: Foreclosures are rising which will make homes more affordable (at lower prices) - yes they are still out there.

Nov 02 03:51 PM

[User 430959:]

No housing uptrend for 10 months.

Nov 02 04:59 PM

[Radardoc:]

I'll have some of whatever you're drinking.

Nov 05 04:28 PM

[Ponchovilla:]

It amazes me that this man posts these "green shoots" on Seeking Alpha where the audience is more educated and independent in the thought process. Just look at the comments. Embarrassing to the author except MJP who seems impervious to any evidence contrary to his hypothesis.

I read Carpe Diem for entertainment. Too many of the comments reflect incest (political ideology) of Right wing conservatives thriving on confirmation bias. To be marginally fair, political incest is not limited to right wing conservatives.

His credentials are for a PHD economist. But his blogs are mostly cut and paste POLTICAL COMMENTARY with a possible dab of his own analysis.

I don't believe the University of Michigan is happy with this man. I will guess he is tenured so his "union card" and benefits package is quite strong. Yet his is a union basher in nearly every case whether deserved or not. eg: Average hourly pay of GM workers paid at $70/hr? YUP. Admittedly there is a sliver of truth here. But the sliver would not pass the rigor of freshman economics.

He constantly rants about "mancessions" , health care reform and the real estate recovery based on sales data / housing affordibility provided by NAR sources. Very little original thinking. Stale Bread. Broken Record.

Nov 09 01:53 AM