Housing’s recovery begins with a single step but the forward movement has been hesitant. The overall trend appears to be upward bound but that does not mean that it has been or will be a steady growth. Single-family permits, the earliest signal of housing’s health, hesitated early in the year but returned to a steady albeit slow increase since. New-home sales have ratcheted up and down since the beginning of 2009 although the trend has been upward. Existing-home sales have bounced around the low 3 million mark on an annual basis for more than three quarters.
A hesitant housing recovery as that described above is not a typical housing recovery. Single-family housing starts usually bottom about two quarters before the end of a recession. As the recession ends, single-family starts average monthly growth rates between 5 percent and 8 percent. The soft upturn in single-family starts that began in January has not produced the kind of growth typical of an early recovery, and the NAHB forecast for 2010 does not envision the strong performance usually experienced in a “normal” housing recovery.
The reasons for a slower-than-normal housing recovery occupy headlines and comply with basic economics—too much supply and not enough demand. The number of homes on the market is significantly larger than the demand, and that number is expected to expand as foreclosures grow.
The Census Bureau reports over two million vacant homes for sale, which includes newly built homes, and the National Association of Realtors reports almost 4 million existing homes for sale, which includes most of the vacant homes. There are less than 150,000 newly built and completed homes for sale, so the vast majority of the excess lies in the existing-home inventory.
Job losses will aggravate the over-supply of for-sale homes as laid-off workers cannot meet their mortgage payments and cannot sell their homes at a price that will allow them to pay off the mortgage. For the near term, unemployment is a much bigger foreclosure driver than interest rate resets or inappropriate mortgage instruments. Since job losses typically continue beyond a recovery in output, and foreclosures extend beyond that, the supply of foreclosed homes will continue to feed the excess into mid-2010. The excess need not be run down before new homes can be sold, but the overload will continue to put downward pressure on prices.
Under normal conditions, an inventory of fewer than 300,000 newly built homes for sale would be quite comfortable. However, the current selling pace is so much lower that it would take eight to 10 months to sell the inventory at current demand rather than a more comfortable four to six months.
Consumer attitudes have improved as measured by the Michigan Consumer Sentiment and the Conference Board Consumer Confidence Indexes. But both measures have taken a step back in previous months and the attitudes toward buying a home have also seesawed since the beginning of 2009. The overall consumer attitude measures as well as the outlook for a home purchase are more positive now than at the beginning of the year. The NAHB-Wells Fargo Housing Market Index of builder sentiment has also shown improvement since March although not without a one-point dip in June.
Unfortunately, uncertainty breeds uncertainty so potential home buyers remain on the sidelines as the unsold inventory head winds persist. From a very low base of home buying, very small changes in consumer attitudes and underlying economic drivers swing demand back and forth. As house prices stabilize and employment losses slow and turn positive, buyers will gain more enthusiasm for buying a home. Low mortgage rates, the first-time home buyer tax credit, and low home prices have made buying a home very affordable. The recovery will persist, but it will be a bumpy one.