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Commentary & Analysis

Housing Barometer: Recovery Staggers Forward

By | March 26, 2014
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.


Recovery Staggering Ahead Drunkenly

Of the Housing Barometer’s five indicators, all have improved over the last year except new construction starts. But only rising home prices and falling delinquencies + foreclosures have been steady. The other three measures – sales, starts, and young-adult employment – have zigzagged, both gaining and losing ground over the year:

  • Home prices have had a strong and steady recovery. Trulia’s Bubble Watch shows prices were 5% undervalued in Q1 2014, compared with 15% at the worst of the housing bust, which means that prices are two thirds (67%) of the way back to their “normal” level of being neither over- nor under-valued. One year ago, prices looked 10% undervalued – just one third of the way back to normal from their worst levels. Recently, price gains have slowed, causing prices to approach normal a bit more slowly in the last quarter.
  • The delinquency + foreclosure rate was 63% back to normal in February 2014, up from 42% one year earlier. With rising prices and an improving economy, fewer homeowners have become seriously delinquent on their mortgages in the first place. At the other end of the pipeline, more foreclosures are being completed and sold. The remaining foreclosure inventory is increasingly concentrated in Florida, New York, and New Jersey, and other judicial-foreclosure states where the foreclosure process can take years.
  • Existing home sales (excluding distressed) were 61% back to normal in February, up from 53% one year earlier. But it’s been a bumpy year for sales: they improved to 79% back to normal before falling down to the current rate of 61%. Higher home prices and mortgage rates have reduced affordability. Furthermore, the mortgage market might be in a temporary adjustment period with the new mortgage rules, though mortgage credit will likely loosen rather than tighten going forward.
  • New construction starts are just 44% of the way back to normal, down from 45% back to normal one year ago. But within new construction, the recovery is uneven. Starts of single-family homes and condo buildings are still lagging, but apartment construction hit a 15-year high in 2013. This apartment boom in 2013 is in anticipation of more young people moving out of their parents’ homes and into their own rentals. And, speaking of young people …
  • Employment for young adults has finally improved. February’s three-month moving average shows that 75.8% of adults age 25-34 are employed, up from 75.0% one quarter earlier. Young-adult employment is now 39% back to normal. While that’s not halfway back to normal, it’s a clear improvement over the dip down to 25% in the second half of 2013. Because young adults need jobs in order to move out of their parents’ homes, form their own households, and eventually become homeowners, the housing recovery depends on Millennials getting jobs.

Why the Recovery Has Been Bumpy

Why is the housing recovery staggering ahead rather than moving confidently forward? Three reasons:

  1. Affordability is worsening. Even though it remains cheaper to buy a home than to rent in the 100 largest metros, homeownership is now more expensive than it was last year, thanks to rising prices and higher mortgage rates. And declining affordability is a bigger challenge for first-time home buyers than for current homeowners looking to trade in a home that has also increased in value.
  2. Investors are stepping back. Now that prices have risen, and fewer people are losing homes to foreclosure, investing-to-rent makes less sense. Until recently, investors had been an engine pushing up home sales and prices; as they step back, price gains are slowing and sales volumes are sagging.
  3. The mortgage market is shakier. Both mortgage purchase applications and mortgage-based home sales are declining. Mortgage rates are rising and have been volatile, and the new mortgage rules add short-term uncertainty. But this reason may be only a temporary hurdle: rates remain low by historical standards, and the new mortgage rules offer longer-term clarity that should encourage banks to make more loans that are within the new rules.

These reasons have contributed to recent stumbles in sales and starts. (Winter weather hurt, too, but hasn’t been the main factor.) However, the two recovery measures that aren’t dependent on affordability, investor demand, or mortgages are showing signs of strength: the delinquency + foreclosure rate is dropping, and young adults are going back to work. The boost to young-adult employment is especially important right now. The less the recovery can depend on the engine of investors, the more the housing market will need to rely on young adults entering the housing market, first as renters – and eventually as buyers.

NOTE: Trulia’s Housing Barometer tracks five measures: existing home sales excluding distressed (NAR), home prices (Trulia Bubble Watch), delinquency + foreclosure rate (Black Knight), 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%; Black Knight 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 February data for the employment rate, existing home sales , new construction starts, and the delinquency + foreclosure rate; and Q1 for home prices.