Selasa, 26 Februari 2013

More evidence that housing has bottomed

Increasingly, the evidence suggests that the U.S. housing market hit bottom sometime in the past year or two. Housing prices are now on the rise from levels that marked a huge decline from the prior peak. If there are any problems with today's housing market, it is a shortage of homes for sale and the difficulty that many borrowers are having finding financing, due to tighter regulatory guidelines.

These two measures of housing prices show that prices rose between 7-12% last year, and are relatively unchanged for the past four years.

In real terms, the Case-Shiller measure of housing prices rose 5.5% last year, after falling over 40% from its early 2006 peak. This is how markets clear: as time passes, prices fall until the supply and demand for homes reaches a new equilibrium and prices stop falling. By all measures, there has been plenty of time and price adjustment for this market to clear. We therefore are most likely entering a new phase of the housing cycle, in which prices will tend to rise even as new supply comes on the market.

A different version of the Case-Shiller data, going back to 1987 but covering fewer markets, tells the same story. After a huge decline from the 2006 high, inflation-adjusted prices today are only 15% higher than they were in 1989, 23 years ago.

This chart of real median home prices goes back even further and tells the same story. From an historical perspective, inflation-adjusted home prices are only slightly higher today than they were many decades ago, yet interest rates are much lower. Homes have never been so affordable. As buyers become more confident that prices are not going to fall and are more likely to rise, demand for homes will continue to rise. Sellers, meanwhile, will be less anxious to sell as they see that prices are firming. The millions of homeowners who are still "underwater" will also become less anxious about their plight as prices rise. In short, the market has lots of room and time to recover. Housing is now a "sellers' market" in many areas of the country. 

As the chart above shows, housing prices are much more affordable today than they were in 1989, because real incomes are up and borrowing costs are down. 30-yr fixed rate mortgages were 8% in 1989, and they are less than 4% today.

There has been a significant decline in the number of vacant homes for sale. Banks may still be holding back lots of inventory, but what is coming on the market is selling. The vacancy rate today is not unusually high at all, from an historical perspective.

These charts make it clear that there is a shortage of homes for sale. The supply of homes for sale, relative to the current sales pace (which itself is very depressed) is about as low as it has ever been.

New home sales (today's big news release) were up over 15% from November to December, and they rose almost 30% last year. But they are still extremely depressed compared to the pace of the past two decades. With housing starts up over 60% in the past two years, new home sales are almost certain to post very strong gains this year.

A strong housing market is going to provide good support for the economy in the years to come.

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