Housing Barometer: Recovery Staggers Forward

By | Mar 26, 2014 12:01AM

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

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:

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.

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