The Great Recession was a depression for housing. Construction activity collapsed more than any time since the beginning of World War II. The total number of homes started in 2009 was the lowest in three generations.
The recovery has varied by location, but it is here. In 2014, housing starts should pass the 1 million mark on the way to a sustainable level of 1.7 million housing starts per year.
From a local standpoint, the progress toward a more normal level of construction is greatly dependent on how far the market sank before turning around. Recovery speed depends on local economic conditions, employment growth, distressed home sales, strength of the home builders, and many other idiosyncratic elements of a local market.
Monitoring the Market In 2011, the NAHB began tracking individual market curing with the NAHB/First American Improving Markets Index (IMI). The index monitored metropolitan areas that showed six-month improvement in three critical indicators of economic and housing health: single-family permits, home price appreciation, and employment.
Beginning in September 2011, 12 markets satisfied the definition of improving, and the index ultimately rose to 291 out of a potential 361 markets—or more than 80 percent of all markets. National figures now demonstrate the same point; housing starts are up almost double their low point, home prices are up 15 percent from their bottom, and the economy has added back 7 million jobs. Tracking the beginning of a market recovery now moves to tracking progress toward complete recovery.
In October, the NAHB introduced the NAHB/First American Leading Markets Index (LMI) to replace the IMI and begin a monthly monitor of proximity to a normal market. The same three elementary indicators are used, but instead of measuring from the bottom, the LMI measures the most recent levels compared with levels under more normal market conditions. The single LMI for every market is the average of the three component indexes.
Path to Normalcy? The U.S. LMI is 0.85, meaning general market conditions as measured by housing construction, home prices, and employment are within 15 percent of a normal economic growth path. Within the composite index, the three measures show significant difference in their path back to normal. Home prices are 18 percent above the last normal period from 2000 to 2003; total employment is back to 94 percent of normal, last seen in 2007.
But single-family construction remains at 43 percent of the expected normal levels recorded in 2000 to 2003. While the overall path to normalcy is within sight, it remains the slowest housing component to recover. The NAHB expects employment to be back to normal levels next year, but single-family construction will not do the same until 2016.
Individual local markets have exceeded their last normal levels. Fifty-two metropolitan areas have an LMI at or above 1, primarily because of strong energy sector economies. Almost half of the 52 recovered markets have seen housing production return to and exceed the last normal period. Single-family progress is behind one or both of the other two indicators in all but a few of the 361 markets tracked.
Proximity to a normal market is greatly dependent on the local economic base and the depth of collapse. Markets in the Midwest region experienced large declines because the fundamental economic base eroded and is returning slowly, dependent on new employment sources. Markets that experienced wild ups and downs in home prices and production also are recovering but remain further from normal because the bottoms were so deep.
Within the slowest 100 markets to recover, 83 percent are in 11 states—California, Arizona, Nevada, Florida, Minnesota, Wisconsin, Michigan, Illinois, Indiana, Ohio, and Georgia. Even the slowest is more than halfway back, but their extraordinary falls put these markets as the last to return to normal.
View the LMI and its components—updated monthly—online at www.nahb.org/LMI.
Learn more about markets featured in this article: Anderson, IN.