Housing: A Long Way From Normal
Remember suburban Phoenix, home of empty subdivisions with green swimming pools and roving coyotes? It’s booming again. A house in Glendale got 95 offers and eventually sold for 17 percent above the asking price. “This is not something we would see in a normal market,” says Michael Orr, director of the Center for Real Estate Theory and Practice at Arizona State University’s W.P. Carey School of Business.
After falling 57 percent from 2006 through last October, Phoenix metro housing prices rose 12 percent through April and have continued upward since, according to the Standard & Poor’s/Case-Shiller home price indexes. In Atlanta, meanwhile, the housing recession is far from over: Home prices fell 17 percent in the year through April to their lowest point since 1997, according to Case-Shiller.
Housing is most Americans’ biggest asset and crucial to the health of the overall economy, so it’s natural to ask when it will get back to normal. As the contrast between Phoenix and Atlanta shows, the answer is: not yet. The sector remains roiled by extremes. The lowest mortgage rates in history, courtesy of a recession-fighting central bank, coupled with the biggest drop in housing prices since the Depression, have made homes the most affordable since 1970, according to the National Association of Realtors. But people can’t scrape up a down payment when mortgages on their current residences are underwater. Banks have tightened lending standards even as the bad economy has lowered many borrowers’ credit scores. And the country is stuck in the longest period of 8 percent-plus unemployment since the government began keeping track in 1948.
These powerful positive and negative forces are almost canceling each other out, leaving a small net “up” nationally. Zillow, an online marketplace, said on July 24 that home values in the second quarter posted their first year-over-year increase since 2007. The next day the Department of Commerce said new-home sales fell 8.4 percent in June—and revised previous months’ sales up. The push and pull are not what anyone would call normal. “Most local housing markets still have a way to go to achieve a clean bill of health,” economists at the Federal Reserve Bank of New York wrote in a July 17 report.
Home prices fell by a third from 2006 through 2009 and then staged three phony recoveries before slumping again. The Standard & Poor’s/Case-Shiller National Home Price Index hit a post-bust low in the first quarter of 2012, dropping to 2002 levels. After such gyrations, it’s hard for anyone to say that prices are even roughly correct at today’s levels. “What’s normal?” asks Comerica Bank Chief Economist Robert Dye.
Now that housing is cheap in comparison with rents and incomes, the biggest risk is a faltering economy. “If the broader economy weakens in the short term, the housing rebound could again stall,” says Harvard University’s Joint Center for Housing Studies annual report.
That’s a real possibility as forecasters mark down their outlooks for economic growth. Sam Khater, senior economist for CoreLogic, a housing data company, says in a new report that home prices have little room for further increase because they are highly correlated to median incomes, which, he points out, “have not increased on an inflation-adjusted basis since 1996.”
Although the so-called shadow inventory of unsold real estate has shrunk since its 2010 high, CoreLogic calculates that there are still 1.5 million homes in various stages of delinquency or foreclosure that don’t show up in measures of housing supply. “The broad dynamics are still quite scary,” says Michael Feder, chief executive officer of housing data company Radar Logic, in a July 24 report. “We think housing is still a short.”
At least residential real estate is no longer dragging down the rest of the economy. The rebound in home prices and decline in mortgage debt has begun to restore Americans’ housing wealth, which helps the economy by making them more willing to spend. According to Fed data, owners’ equity in household real estate fell by $7 trillion, or more than half, from the end of 2005 through the last quarter of 2011. It increased by about $400 billion in the first three months of this year, the fastest pace of growth in more than 60 years.
Construction is recovering, too. It’s been adding to gross domestic product growth since the second quarter of 2011, according to Department of Commerce data. The industry’s prospects are generating excitement in the stock market. The S&P Supercomposite Homebuilding Index, which fell almost 90 percent from 2005 to 2008, is up 50 percent in 2012 as of July 23, eight times the gain of the Standard & Poor’s 500-stock index.
There’s plenty of room for homebuilders to grow. Even after the latest uptick, starts on new homes are running at a pace that’s less than half what’s needed to accommodate the demand from young people moving out on their own, plus replacement of obsolete or damaged dwellings, says David Dwyer, director of global research for Bloomberg Industries. “This has been such a historic depression in housing that as soon as you see signs of a turn,” he says, investors in homebuilder stocks tend to “move first and ask questions later.”
If events unfold perfectly, the contradictory forces pushing on the housing market will moderate. The Fed will allow interest rates to rise from their historic lows. Simultaneously, the economy will gain momentum and generate more jobs. Likewise, the oversupply of foreclosed homes will be absorbed by pent-up demand from young families that have been shut out of the market. “Demographics will assert themselves at some point,” says Macroeconomic Advisers, a St. Louis-based consulting firm. Over time, then, the U.S. housing market will become increasingly normal. Just not yet.