The housing recovery is underway but its speed will vary significantly across states and metropolitan areas. Total housing starts for 2010 will be up about 25 percent from 2009, which recorded the lowest annual production levels since the 1940s. Some states will see near “normal” levels of production within the next two years while others will take longer to return to historic, population-driven production levels.
Broadly speaking, there are three different paths out of the great housing recession. Most states have suffered a housing downturn because of the nationwide recession. A few states have suffered greater declines because of the underlying economic base. And, finally, a handful of states had house price growth and production increases that were significantly more than their neighbors and their return to normal will take longer.
Housing production of just over a half million homes in 2009 was one-quarter of the peak production in 2005 and just over 40 percent of the average annual production levels throughout the 1990s. Four states (Arizona, California, Florida, and Nevada) saw significant increases in production relative to what history would indicate as typical as well as large price increases relative to income. California and Florida peaked at about twice their 1990 average production levels. The home price-to-income ratios in those four states doubled. For instance, California home prices were almost five times median income throughout the 1990s (a ratio that was and is much higher than other states). House price increases pushed that ratio to over nine in 2005. The house price-to-income ratios have fallen back to historic levels but some of that readjustment is due to the composition of homes sold as foreclosures and first-time buyers make up a substantial share of sales in the most distressed states. As a result, 2009 production levels in those four states are less than 20 percent of their peak. Finally, over 40 percent of the foreclosures started and seriously delinquent mortgages in the U.S. are concentrated in these four states.
Another three states (Michigan, Illinois, and Ohio) are at 30 percent or less of their historic averages and under 25 percent of their muted peaks of the mid-2000s. Michigan and Ohio housing production peaked earlier than the 2005 national peak but have continued downward as the underlying auto production economic base weakened. Current housing production levels are under 30 percent of their historic levels. Home price-to-income ratios rose in all of these states, but less than the nation and all have fallen below their averages in the ’90s. In addition, 12 percent of the foreclosures started in the U.S. are concentrated in these three states. A housing market return will be dependent upon underlying economic improvement in these states.
Two other states (Colorado and Georgia) stand out from the remainder in terms of continued stress that will stretch out their return. Colorado peaked in housing production in 2001 and 2009 was down more than 80 percent from that level. The house price-to-income ratio did rise more than the national change but has since settled below historic levels. Georgia is driven by the Atlanta market where 2009 production was 9 percent of the peak in 2004.
The remaining 41 states will drive the recovery in the near term. Collectively, these states’ production levels are at 35 percent of their respective peaks and almost 60 percent of their ’90s average. While still some distance away from “normal,” 80 percent of the states have less distance to travel to get back to historic, population-driven production levels. They contain less than half of foreclosures started and seriously delinquent mortgages.
The national speed of recovery will continue to depend upon local market conditions such as housing vacancies, future foreclosures, and employment recovery. Many of the 41 states are relatively small states so that even robust returns in states such as Wyoming and the Dakotas will not add to the national output. Texas is the largest state that is closest to regaining normal levels of production.
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