The housing recovery is real

A variety of surveys show that housing prices on average rose 10-14% in the year ended last March. Nominal housing prices are now at a post-recession high, after being relatively flat for the past four years. Over the same period, an index of the stocks of major home builders has risen 245%, housing starts are up 78%, and residential building permits have almost doubled. The conclusion is obvious: the housing market recovery is real and robust.

The two surveys of housing prices shown in the chart above use different methodologies but arrive at similar results: prices are up between 10 and 14% over the past year, and prices are now at a post-recession high. (The Case Shiller index tracks the sale price of the same houses over time, and reports the average price of homes sold, and the Radar Logic index tracks the average cost per square foot of homes sold. For this chart I have used the seasonally adjusted Case Shiller index and the nonseasonally adjusted Radar Logic index.)

Adjusted for inflation, housing prices fell over 40% from their early-2006 high to their early-2012 low, according to this measure of prices in 20 major metropolitan markets. That's a huge downward adjustment—by far the biggest in modern times—but it was necessary to clear the a very large excess housing inventory.

The chart above covers a longer time span, but only 10 major metropolitan markets. The decline in inflation-adjusted housing prices from 2006 to 2012 was almost identical to the decline in the prior chart. Prices today are about 17% higher in inflation-adjusted terms than they were in 1989. However, 30-yr fixed mortgage rates were over 9% back then, whereas they are only 3.75% today. Thus, the monthly cost of buying the same house today is about 60% less than it was in 1989. Housing has never been more affordable for the average family than it is today, as shown in the second chart above.

Home builders' stock prices are up 245% from their recession-era lows, as the above chart shows.

This index of homebuilders' market sentiment (builder perceptions of current single-family home sales and sales expectations for the next six months) has improved dramatically over the past year or so, but it is still under 50, the point at which just as many builders rate conditions as "good" as do "poor." In other words, even though there has been a dramatic improvement in the housing market, there is no sign of excessive optimism among major home builders.

Consumer confidence has likewise improved dramatically from its recession lows, but confidence is still at levels that were consistent with prior recessions. We are still far from reaching conditions which might be considered "optimistic." Skepticism and caution are still widespread, and that means that there is plenty of room for the housing market to improve in coming years.