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Housing Barometer: Recovery Staggers Forward Visualization Preview

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Housing Barometer: Recovery Staggers Forward

Trulia’s Housing Barometer shows that 4 of the 5 key housing indicators improved over the past year: prices, the delinquency+foreclosure rate, non-distressed home sales, and young-adult employment are all in better shape than one year ago. However, despite improvement, young-adult employment still isn’t halfway back to normal; neither is the fifth indicator, construction starts.

How We Track This Uneven Recovery
Since February 2012, Trulia’s Housing Barometer has charted how quickly the housing market is moving back to “normal” based on multiple indicators. Because the recovery is uneven, with some housing activities improving faster than others, our Barometer highlights five measures:

  1. New construction starts (Census)
  2. Existing home sales, excluding distressed sales (National Association of Realtors, NAR)
  3. Delinquency + foreclosure rate (Black Knight, formerly LPS)
  4. The employment rate for 25-34 year-olds, a key age group for household formation and first-time homeownership (Bureau of Labor Statistics, BLS)
  5. Home-price levels relative to fundamentals (Trulia Bubble Watch)

The first four measures are reported monthly; to reduce volatility, we use three-month moving averages for these measures. The fifth, prices from our Bubble Watch, is a quarterly report. For each indicator, we compare the latest available data to (1) its worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level.

Housing-Barometer_Q12014

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Housing Barometer: Recovery Moving Ahead, Unevenly Visualization Preview

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Housing Barometer: Recovery Moving Ahead, Unevenly

Trulia’s revised Housing Barometer shows that 3 of the 5 key housing indicators are on track towards a full recovery. Home sales and prices are approaching normal levels, but construction and young-adult employment are badly lagging. At the metro level, some housing markets are fully recovered, while others are far from normal.

Jed Kolko, Chief Economist
December 11, 2013

Tracking This Uneven Recovery
Since February 2012, Trulia’s Housing Barometer has charted how quickly the housing market is moving back to “normal” based on three indicators: construction starts (Census), existing home sales (NAR), and the delinquency + foreclosure rate (LPS). Today, we’re re-launching our Housing Barometer, which better tracks the uneven recovery with some recalibrations and two additional housing market indicators:

  1. The level of home prices relative to fundamentals, based on our own Bubble Watch report.
  2. The employment rate for 25-34 year-olds, a key age group for household formation and first-time homeownership, based on the Bureau of Labor Statistics’s (BLS) monthly employment report.

In addition to adding two new measures, we’re excluding distressed sales from existing-home sales because non-distressed sales are a better measure of healthy market activity than overall sales. We’re also using three-month moving averages for the indicators that are reported monthly (sales, delinquency + foreclosure rate, starts, and employment) to smooth out volatility.

For each indicator, we compare the latest available data to (1) the worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level. We’re also no longer averaging together the “back to normal” levels across different indicators because the average masks huge differences among these indicators. Instead, we are taking a closer look at the recovery of each indicator: three are most of the way back to normal and closing the gap quickly, while two others are stagnating near troublesome lows.

MD-235 Housing Barometer_9

Back to Normal Or Left Behind: 3 in 5 Key Market Indicators Recovering
Of the Housing Barometer’s five indicators, prices and sales are getting close to normal. Delinquencies + foreclosures, while not as close to normal as prices and sales, have improved significantly in the past year. The other two measures – new home starts and jobs for young adults – still have a long way to go:

  • Existing home sales (excluding distressed) were 79% back to normal in October, up from 51% one year earlier. While existing and pending home sales have slipped in recent months, distressed sales – foreclosures and short sales – account for much of the drop. The mix of sales continues to shift from distressed to non-distressed, which is a sign of market recovery.
  • Prices have had an astounding recovery in the past year. Trulia’s Bubble Watch shows prices were 4% undervalued in Q4 2013, compared with 15% at the worst of the housing bust, which means that prices are almost three-quarters (71%) of the way back to the “normal” level of being neither over- nor under-valued. One year ago, prices looked 13% undervalued – just 16% of the way back to normal from their worst levels – leading home prices to win the “most improved” award over the past year.
  • The delinquency + foreclosure rate fell to 8.92% in October after rising to more than 14% during the recession. This rate is now 59% back to normal. Rising prices and an improving economy have caused fewer borrowers to become seriously delinquent on their mortgages in the first place; at the other end of the pipeline, more foreclosures continue to get completed and sold. The remaining foreclosure inventory is increasingly concentrated in Florida and several other states with long legal foreclosure processes.
  • New home starts are just 36% of the way back to normal. The latest three-month average (from August because more recent data have been delayed by the government shutdown) is 870,000 starts, well below the long-term norm of 1.5 million. Construction, however, is looking up: the latest permits data, for October, showed a jump to 1.03 million, which heralds an increase in starts in November or December.
  • Employment for young adults is the recovery’s caboose. Just 74.9% of adults age 25-34 are employed, which is only 23% back to normal (79.3% employment rate) from the worst level of the recession (73.6%). Young adults need jobs in order to move out of their parents’ homes, form their own households, and eventually become homeowners. In turn, construction depends on household formation. The housing market cannot fully recover until young adults get back to work.

Which Local Markets are Back to Normal?
Not only are different housing market activities recovering at different rates, the housing recovery is uneven across local markets, too. To track local recoveries, we examine two of the above indicators at the metro level: prices relative to local norms, from Trulia’s Bubble Watch, and construction permits relative to local norms, from the Census. These two measures are strongly correlated: as the scatterplot below shows, in metros where prices are near or above normal, construction permits are also near or above normal.

Trulia_HousingBarometer_Scatterplot

Of the 100 largest metros, 10 are back to normal or nearly there for both prices and permits. (By “nearly there,” we mean that prices are undervalued by less than 2% and permits are less than 10% below normal.) These include Austin, Dallas, and Houston in Texas; Orange County, San Francisco, and San Jose in California; and Denver, Seattle, Nashville, and the Bethesda, MD, metro areas.

These 10 metros share a couple things in common: they weren’t among the worst-hit markets in the housing bust, and they’ve had relatively strong job growth in the recovery. However, these recovered metros are NOT the markets with the biggest price increases. Among the 10 recovered metros, only one – Orange County – is also in the top 10 for year-over-year price gains, according to the November Trulia Price Monitor. In contrast, some of the markets with the largest price increases, like Las Vegas and Detroit, are still far from fully recovered. Local price increases, by themselves, are a poor guide to whether local markets have recovered: instead, the markets with the biggest price increases in 2013 are those that suffered the biggest price declines after the housing bubble burst.

To sum it up: Trulia’s Housing Barometer shows that the recovery has progressed on most fronts. Non-distressed sales and home prices are approaching normal levels and could reach them in 2014. Delinquencies + foreclosures are also improving, though “normal” is still more than one year away. The red flags are construction starts and young-adult employment, both of which remain closer to recession levels than to normal. The recovery has gone a lot farther for homeowners, who benefit from rising home values, and real estate agents, whose commissions rise with both prices and sales, than for construction workers or young adults looking for jobs. The recovery also looks much better in the San Francisco Bay Area, Texas, and other markets that are back to normal than in wide swathes of the country where normal isn’t yet within reach. Even as the recovery progresses overall, it remains stubbornly uneven.

NOTE: Trulia’s Housing Barometer tracks five measures: existing home sales excluding distressed (NAR), home prices (Trulia Bubble Watch), delinquency + foreclosure rate (LPS), new home starts (Census), and the employment rate for 25-34 year-olds (BLS). Also, our estimate of the “normal” share of sales that are distressed is 5%; LPS reports that the share was in the 3-5% range during the bubble. For each measure, we compare the latest available data to (1) the worst reading for that indicator during the housing bust and (2) its pre-bubble “normal” level. We use a three-month average to smooth volatility for the four indicators that are reported monthly (all but home prices). The latest published data are November for the employment rate; October for existing home sales and delinquency + foreclosure rate; August for new home starts (September and October were delayed due to government shutdown); and Q4 for home prices.

 

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With Recovery 67% Back to Normal, Trulia Retires Housing Barometer

Trulia’s Housing Barometer shows the recovery is now two-thirds of the way back to normal. Existing home sales have returned to their long-term normal level, while construction lags significantly. The recovery is not a straight line: it moves through different phases.

Jed Kolko, Chief Economist
September 26, 2013

Since February 2012, Trulia’s Housing Barometer has charted 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 August 2013, all three measures improved: construction starts and existing home sales rose slightly, while the delinquency + foreclosure rate moved strongly downward:

  • Construction starts increased a bit, but still far from normal. Starts were at an 891,000 seasonally adjusted annualized rate – up 1% from July and 19% year-over-year. Still, construction starts are 40% of the way back to normal – the slowest recovering measure of Trulia’s Housing Barometer.
  • Existing home sales have returned to normal. Sales rose in August to a seasonally adjusted annualized rate of 5.48 million – that’s up 13% year-over-year, and up 29% year-over-year when foreclosures and short sales are excluded. Overall, existing home sales are 99% back to normal, even though foreclosures and short sales still make up roughly one eighth of all existing home sales.
  • The delinquency + foreclosure rate continued its downward march. The share of mortgages in delinquency or foreclosure dropped to 8.66% in August, the lowest level in over 5 years. The combined delinquency + foreclosure rate is 60% back to normal.

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Housing Recovery in Phase Three: Market 64% Back to Normal

Trulia’s Housing Barometer shows the recovery has entered a new phase as mortgage rates rise and inventory expands. While prices and existing-home sales are near normal, construction and new-home sales have a long way to go.

Jed Kolko, Chief Economist
August 27, 2013

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 July 2013, all three measures improved: construction starts and existing home sales rose, while the delinquency + foreclosure rate notched downward:

  • Construction starts increased but still have a long way to go. Starts were at an 896,000 seasonally adjusted annualized rate – up 6% from June but slightly below the average rate from the first six months of 2013. Year to date, single-family and multi-family starts rose 20% and 33%, respectively, above last year’s levels. Construction starts are 41% of the way back to normal.
  • Existing home sales leapt to their second-highest level in six years. Sales jumped in July to a seasonally adjusted annualized rate of 5.39 million – that’s up 17% year-over-year, and up 31% year-over-year when excluding foreclosures and short sales are excluded. For the sixth straight month, inventory expanded, even after taking seasonality into account. Overall, existing home sales are 94% back to normal.
  • The delinquency + foreclosure rate continued its retreat. The share of mortgages in delinquency or foreclosure dropped to 9.23% in July, the second-lowest level in almost 5 years. The combined delinquency + foreclosure rate is 56% back to normal.

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Mid-Year Housing Check: Firing on Most Cylinders

In June, the housing market was 54% back to normal, down from 60% in May. But looking back at the first half of 2013 reveals a housing recovery that’s moving ahead with few red flags.

Instead of our usual monthly Housing Barometer, we’re taking a mid-year temperature check of the housing market while looking ahead at what to expect throughout the rest of this year. All three of our regular Housing Barometer measures – new construction starts, existing home sales, and the delinquency + foreclosure rate – stumbled in June, pushing the recovery down from 60% “back to normal” in May to 54% in June. But June’s numbers mask favorable underlying trends for all three metrics:

  • New construction starts (Census) were up 24% in the first half of 2013 compared with the first half of 2012.
  • Existing home sales (NAR), excluding foreclosures and short sales, were up 32% year-over-year in June.
  • The delinquency + foreclosure rate (LPS First Look) was down 14% year-over-year in June.

Overall, the housing recovery is in healthy shape. Here’s a round-up of the top three changes in the housing market so far in 2013:

  1. Prices climbed steeply, outpacing rents, but are far from bubble territory. According to the Trulia Price Monitor, asking home prices were up 10.7% year-over-year in June. Prices rose year-over-year in 99 of the 100 largest metros, most sharply in California and elsewhere in the West. In contrast, rents rose just 2.8% year-over-year nationally. But this is a rebound, not a bubble: prices still look 7% undervalued compared with long-term fundamentals, and buying a home is still 37% cheaper than renting. However, today’s rapid price gains won’t last: fading investor demand, rising mortgage rates (see #2), and more homes for sale (see #3) should all slow down price gains and prevent us from getting back into a bubble.
  2. Mortgage rates leapt upwards, reducing refinancing activity. After hitting record lows in late 2012, the 30-year-fixed mortgage rate rose more than a full point between early May and July. Rising rates are now the top worry for prospective homebuyers: in fact, more than half of Americans said they would be discouraged from buying if rates reach 6%, the normal level in the pre-crash 2000s. However, rising rates haven’t yet caused a skid or spike in either prices or sales. The main effect of rising rates has been a huge drop in refinancing – down by more than half since early May. Although rates should continue to rise, and that will slow down price gains, rising rates won’t derail the housing recovery. At today’s prices and rents, buying will remain cheaper than renting until rates hit 10.5% – a level last seen in 1990.
  3. After hitting a 12-year low, inventory is expanding. At the start of 2013, inventory hit a 12-year low thanks to years of little new construction, homeowners unwilling to sell soon after prices bottomed in 2012, and fewer foreclosed homes on the market. Last December, we identified “Would inventory bottom?” as the key housing question for 2013, and the answer quickly appeared: yes. While inventory typically reaches its annual low in the winter, increasing throughout spring and summer, seasonally adjusted inventory bottomed in January and has increased for five straight months since then, up 6% in total.

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