Wednesday, July 29, 2009

Looking for a Housing Recovery

Recent reports have shown that housing starts, new home sales and some measures of housing prices have not only stopped their decline, but have improved. Does that mean that the housing recovery has begun? Yesterday's release of the Case-Shiller housing price index may confirm that it has.

The housing crash is the single most important factor that started this recession, so it would be nice to know when it will end.

We have known for a while that the basic supply and demand ingredients would permit a genuine housing recovery this summer. Population has continued to grow more and larger families tend to create more housing demand =97 and housing construction has been practically nothing for the past nine months. Thus, while the housing inventory exceeded the demand in 2007 and 2008, it looked like demand would catch up by this summer.

As demand catches up, housing prices should stop falling and stabilize at more normal levels (sorry, we cannot expect to see 2005 housing prices any time soon). Housing construction would proceed at a normal pace, which in 2010 and beyond would keep the supply of housing together with the demands created by population and income growth.

Of course, we are in a recession now, and most of us feel that we have less income than we once did. In an earlier post, I showed how this could hold back demand despite the continued population growth, at least if people did not expect their incomes to recover soon.

Moreover, some think that banks want to avoid granting mortgages, because those loans caused them so many problems in 2007 and 2008. Without bank lending, housing demand could also be depressed despite continued population growth.

Because income and lending factors could offset population growth, it will be comforting to see actual housing data that characterize a recovery: stabilized housing prices, more home sales and a healthy amount of new construction.

Housing construction continued to fall this spring far short of what anyone would consider =93normal.=94 But recently we learned that housing starts the beginnings of new home building projects were quite high in June 2009. If those starts are eventually finished, that probably means a more normal pace of construction activity this summer.

For several months now, there have been conflicting reports as to housing prices. An often-followed housing price index (calculated by the Federal Housing Finance Agency, or F.H.F.A.) showed prices stabilizing early this spring. In contrast, the Case-Shiller index had suggested that housing prices had been falling as fast as ever.

Some have argued that the Case-Shiller index over-weights regions like California, where the housing market has been much worse than typical in most of America, and that the F.H.F.A. index is enough to tell us that housing prices have stabilized in much of America.

Nevertheless, it was big news yesterday to learn that the Case-Shiller index showed its first increase since June 2006.

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