A pair of new reports on housing released yesterday and today have sparked positive reports on conditions in the housing market. Both indicate that conditions have improved. But comparisons to the recent past can be misleading as conditions have been so miserable. It is important to look at the data also in a long-term context. This blog post updates two which were posted on this site last December (here and here).
Yes, compared to the recent past, conditions have improved. But viewed over a longer term context, one cannot yet say that the changes are significant. The recent data might ultimately turn out to have marked a turning point. But it is too early to say that. Plus there is far to go before one can say there has been a meaningful recovery from the downturn in US housing that started in early 2006 when the housing bubble burst.
The top graph shows the Case-Shiller 10-City Composite home price index for the period from 1980 to April 2012, where the April figures were released this morning. The Case-Shiller numbers are three month moving averages (so the “April” numbers represent an average over February, March, and April in their raw data). The index is calculated by looking at changes over time of individual home prices, comparing the price of the home when it was sold to the price when it was purchased. There is also a broader 20-City Composite Index, but this index only goes back to 2000.
The Case-Shiller numbers indicate an uptick in prices in recent months. But the upticks are small, with monthly increases of just 0.7% in April and also in March, no change in February, and negative before. Compared to a year ago, the index was 2.2% lower.
But all these changes are small compared to the fall of one-third in prices from the peak of the housing bubble in early 2006 to now. Prices were plummeting in 2007 and 2008, and then finally stabilized within a few months of Obama taking office. But there has not been a significant change since then. Nor is it necessarily likely that there will be a significant change anytime soon. As one can see in the diagram, average home prices were fairly flat for almost a decade, from late 1988 to late 1997.
The New Home Sales figures, released yesterday by the Census Bureau, were somewhat more positive. Estimated new home sales in May reached 369,000 at an annualized rate. This was almost 20% higher than the 308,000 figure for May 2011. The January to May, 2012, average pace of new home sales was 352,800, which was 17% above the 300,400 pace of new home sales over January to May 2011 (with all figures at annual rates).
These increases are more encouraging. But they are still small compared to the pace of new home sales that reached close to 1.3 million in 2005 at the peak of the housing bubble, as seen in the graph above. The high rate of new home construction and sales during the bubble was clearly excessive. As was discussed in the earlier blog post, annual sales of about 900,000 a year in the US right now might be considered roughly what is needed, on average, given the US population and its growth. Sales at a pace of 369,000 units a year is still far below this. An increase of 17% over the pace of 300,400 in the January to May 2011 period is good, but sales would need to almost triple (an increase of 200%) to reach 900,000 a year.
Over time, one should expect home building to recover to this roughly 900,000 level. When this happens, it will serve as a significant spur to the economy. And it might well start soon. Taking the 900,000 figure as a rough benchmark, there was excess home construction during the bubble years of the Bush administration from 2002 to 2006. This is shown as the area in blue in the figure above. The excess during this period (i.e. the excess over the 900,000 benchmark) totaled 1.1 million housing units between 2002 and 2006. Construction and sales then plummeted as the bubble burst. With the continued depressed state of the economy, new home demand has remained low, and the cumulative shortfall from 2007 to now (calculated again relative to a 900,000 home unit per year pace as the “normal” demand) has come to 2.5 million units as of May 2012. There is therefore now a net shortfall in housing units of 2.5 million minus the 1.1 million previous excess, for a net of 1.4 million units. And at the current rate of 369,000 units per year (at annualized rates), the net shortfall is growing at a rate of 900,000 – 369,000 = 531,000 units per year, or about 44,000 units per month.
All this is consistent with recent published reports (see this Census Bureau report, or this Washington Post article based on it, from June 20) on how households are “doubling up” in record numbers, particularly with adult children in their 20s continuing to live with their parents. The Census Bureau estimates that the number of doubled up households increased by 2.0 million between 2007 and 2010, with the number of “additional” adults (over and above the household head and his or her spouse or partner, and excluding students) in such households increasing by 3.8 million over this period.
Many of these additional adults will seek their own homes as soon as they can. This will happen when the economy improves, and the home purchases will then in turn serve to spur further improvement in the economy. When this happens, the impact on growth will be significant. A rough calculation in the previous blog post suggested that new home construction and sales returning to a pace of 900,000 per year would add about 1% of GDP, or 2% of GDP assuming a multiplier of two. The Congressional Budget Office estimates that GDP is about 5% below potential, so such growth in new housing construction could act to make up a significant share of the gap.
This pent up housing demand could therefore act as a significant spur to the economy once the process starts. This serves to underscore again how important it is to end the fiscal drag that is holding back the economy, and instead allow fiscal growth such as that which acted as a significant spur to the economy during the Reagan years (as was discussed in this earlier post on this blog). Once growth starts, the recovery of housing construction and sales to a more normal level will act to reinforce the recovery.
It is, however, premature to claim that the recent housing data provides an indication that this recovery is underway. While positive, the changes are still too small, when seen in the longer term context, to bear much weight in drawing such a conclusion.