Tag Archives: U.S. Housing Market

What constitutes a healthy housing market? — Dr. Housing Bubble

What constitutes a healthy housing market? 7 charts Examining where we are today in the housing market. Will the current housing rebound continue into 2013?

Perceptions are guided by recent events.  History is easily forgotten and our hardwiring makes us prone to trend following.  The housing boom that started in 2012 is still the story today.  In 2012 I noticed on various forums that new housing related shows were on the uptick.  The headlines were largely positive.  It is hard to see how the pace of appreciation can continue without a similar underlying real growth in household wages or a continued flood of investor money.  Yet in markets were investors dominate, local families are outbid by global money and big funds.  What makes up a healthy housing market?  Today we’ll examine seven charts and try to put this current housing market into a longer-term perspective.

Normal housing market

There are many factors to examine when it comes to a normal housing market.  I would argue that it is more important to focus on having a healthy economy and allowing housing to follow instead of focusing on housing and expecting the economy to follow.  For over a decade the focus has been on housing and the Fed with QE3 is not disrupting that trend.  Trulia has an interesting barometer on a few key housing metrics:

normal housng market

Source:  Trulia

According to the above barometer, a normal market would have 1.5 million construction starts.  We are at 861k.  We’re making progress here but still a good distance from 1.5 million.  The next item is existing home sales.  We’re at 5.04 million whereas a more normal market would be at 5.5 million.  On this metric we are inching closer to a more normal market.  The number of mortgages in some sort of distress is up to 10.63 percent.  This is still very high compared to the normal rate of 5.25 percent.

Low inventory

The number of homes for sales is extremely low:

national housing inventory

While existing home sales are still short from a more normal level (not by much) housing inventory on the other hand is down by record levels.  At a certain point you would expect this to carry over into housing starts and we are seeing this occur.

Housing starts

Housing starts are definitely on their way up.  This should be expected given the very low inventory.  Yet as we have discussed in previous articles, many younger Americans are saddled with high levels of college debt and are looking for lower priced housing options.  In 2012 31 percent of housing starts were for multi-unit properties.  Stronger rental demand but also, the new clientele base is likely pushing this trend.

30 year fixed rate mortgage

The drop in interest rates is truly historical:

30 year mortgage rate

People calmly talk about this as if we have a historical reference point for this.  We do not.  The Fed now has a balance sheet that is well over $3 trillion.  This is not normal either:

Fed total balance sheet

Fed’s balance sheet as of 1/16/13 (source: FRB)

Prior to the recession, the Fed balance sheet was well under $1 trillion.  We are a very long way from that and the Fed with QE3 is basically eating up MBS from the market.  It is interesting that some would like to discount this activity yet the Fed is dictating interest rates and is the major player in the mortgage market.  In other words, the Fed is the housing market.

Construction jobs

Now this is a trend that I found interesting.  While housing starts are up, construction jobs are still lagging:

construction jobs

What is going on here?  Is it because multi-unit properties require less labor?  I doubt it.  Are construction crews making due with less?  That could be one reason.  This is probably one of the more interesting trends here.  In this category we are also very far away from a normal market.

China wages

In a global system inflation can be exported.  While US wage growth is anemic and inflation adjusted household income is now back to levels last seen in the 1990s, wage growth in China is definitely occurring:

china and us wages

It should come as no surprise then that money is rushing back into places like California and Canadapropping up prices in select areas.  Foreign demand is incredibly strong as the wealthy class rises abroad.  In an open market, money can travel as it sees fit.  Inflationary pressure is charging back in.

Part-time workers

Another trend we are facing is the growth of a permanent part-time workforce.  Many workers now work under contracts or projects.  This is another reason why we have seen the U6 unemployment figure remain high:

us part-time and U6

This is unlikely to be positive for wage growth but does help companies earn more as they slash costs.  It also makes a tougher case for sustained home value growth.  The last few years have seen a large amount of buying come from investors.  Nearly one third of all sales were investor based.  This is incredibly high.  It is hard to find historical data on a normal figure here but I would venture to guess that it is around the 10 percent range for the nation.  In California, foreign demand makes up this portion alone:

“(OC Register) The National Association of Realtors estimated that foreign buyers accounted for 11 percent of California home sales.

The California Association of Realtors, however, pegged foreign sales at 5.8 percent of the state’s transactions. Of those, 39 percent of the buyers come from China, followed by buyers from Canada (13 percent), and from India and Mexico (8.7 percent each), CAR reported.”

Last month over 33 percent of buyers in Southern California paid all cash for their purchases, tying a previous historical record set a few months ago.  The monthly average since 2000 is closer to 17 percent so we are nearly double that.

The above trends show that we really are in a different housing market today.  Will these trends continue into 2013

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Read of the Day: Merrill Lynch on Housing and Construction Employment

Merrill Lynch on Housing and Construction Employment

by Bill McBride on 12/11/2012  

We are still waiting for a strong increase in construction employment, but we know it is coming (I expect construction employment will be revised up in the annual revision).

Michelle Meyer at Merrill Lynch wrote about this today (and more on housing): The housing market in 2013

We believe 2012 will go down in history as a year of transition for the housing market. Housing starts are on track to be up 25% and home prices are set to rise 5% over 2012. We believe the recovery will continue into 2013 for several reasons. Most importantly, household formation has started to turn higher, reflecting the shortfall of household creation over the prior five years. In addition, listed inventory is low, owing to extraordinarily slow construction and only a gradual reduction of the distressed pipeline. And specifically for prices, there has been a shift toward short sales as a means of disposing distressed properties. Moreover, investor demand is strong, particularly for distressed inventory.

We forecast housing starts to increase another 25% to an average of 975,000 and home prices to increase 3% in 2013.

The housing market is turning into an engine of growth once again. Housing construction will likely add 0.3pp to GDP growth in 2012 and 0.4pp to 2013 growth. … The gain in homebuilding will support related sectors such as furniture, building material sales and financial companies. Moreover, construction jobs will finally come back, allowing some of the 2 million people who lost construction jobs to find employment in the field again.

There will also be a jolt to the economy from the gain in home prices. An increase in home values lifts household net worth and boosts consumer confidence. If consumers perceive the gain in wealth to be permanent, they will increase their current consumption. But the rise in home prices can do something even more vital for the economy – it can spur credit creation, which then fuels housing demand and reinforces the gain in home prices. We are seeing the very early stages of a positive feedback loop between the housing market, credit market and real economy, which can be quite powerful in time.

I’ve wrote about the positive impact of prices early this year, see The economic impact of stabilizing house prices?

We are probably already seeing the impact of stabilizing prices on housing inventory. If potential sellers think prices will fall further, then they will rush to sell and list their homes right away. But if potential sellers think prices are stabilizing, and may even increase, they are more willing to wait for a better market or to sell when it is most convenient. I think we are seeing that right now.

More importantly, I think stabilizing prices will give hope to some “underwater” homeowners and we will probably see mortgage default rates fall quicker. And over time, buyers will gain confidence that prices have stopped falling, and I expect demand to increase – and also for more private lenders to reenter the mortgage market and help support that demand.

And this demand will also boost homebuilding and new home sales – since homebuilders will have a better idea of the pricing needed to compete in a market (falling prices makes it hard to plan).

And on construction employment: Back to work we go

There are several ways that the recovery in the housing market multiplies through the economy. One of the key channels is to create jobs in the construction industry and related fields. However, despite the 25% gain in housing starts this year, the construction sector has not added workers. Looking back at prior cycles, it appears that it is normal for construction jobs to lag output by about a year. We think we are on the verge of construction hiring.

As demand for housing continues to improve, construction companies will likely become more comfortable expanding their workforce. In addition, construction workers do not just focus on new construction; they can also find employment for renovations. Renovation spending has been on the rise and will likely receive a boost from Hurricane Sandy rebuilding. We think the future looks brighter for construction workers.

I also expect a pickup in construction employment in 2013.

Read more at http://www.calculatedriskblog.com/2012/12/merrill-lynch-on-housing-and.html#ALyJVyoHjgyg758m.99

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