Trulia’s Chief Economist continues his monthly roundup of new construction starts, existing-home sales and the delinquency-plus-foreclosure rate to see how far away we are from a normal housing market.
What does a “normal” housing market look like, and how far away are we? To figure this out, each month Trulia’s Housing Barometer summarizes three key housing market indicators: new construction starts (Census), existing-home sales (NAR) and the delinquency-plus-foreclosure rate (LPS First Look). For each indicator, we compare this month’s data to (1) how bad the numbers got at their worst and (2) their pre-bubble “normal” levels.
March data, released over the past few days, showed:
—Construction starts slipped in March. The decline in annualized starts from 694,000 to 654,000 pushed starts from 21% of the way back to normal in February down to just 17% in March.
—Existing home sales also slipped, from 4.60 million to 4.48 million. Home sales fell from 48% of the way back to normal in February to 41% in March.
—The delinquency + foreclosure rate improved. (Remember, on this measure, lower is better.) In March, 11.23% of mortgages were delinquent or in foreclosure, versus 11.70% in February, which means that this measure improved from 32% back to normal in February to 37% in March. As we learned from Truila’s December 2011 consumer survey, this is key for consumer confidence: 47% of Americans said fewer defaults and foreclosures would give them confidence that the housing market is getting back on track – more than any other indicator of recovery.
Averaging these three back-to-normal percentages together, the market is now 32% of the way back to normal. That’s a bit lower than in January and February, when the market was 34% of the way back to normal, but still higher than it was in 2011. In fact, the market was only 23% of the way back to normal this time last year.
Bottom Line: The housing recovery is progressing, though it’s taken one step backwards after a few strides forward.
Trulia's Chief Economist takes a monthly look at new construction starts, existing-home sales and the delinquency-plus-foreclosure rate to see how far away we are from a normal housing market.
On the long road of housing recovery, we’re all kids in the back seat wondering: are we there yet? After years of bad news about the housing market, it’s hard to remember what “normal” looks like.
This month Trulia kicks off the Housing Barometer, a quick review of three key monthly indicators of housing recovery: new construction starts (Census), existing-home sales (NAR), and the delinquency-plus-foreclosure rate (LPS). For each indicator, we checked how bad the numbers got at their worst, and then looked even further back in time, before the bubble, to remind ourselves what “normal” looked like. We’re not trying to predict what the new normal will be in the future – we’re just eyeballing the past in order to put this month’s housing data into context.
Here’s what the February data, released last week, show:
— Construction starts: 22% of the way back from their low in Apr 2009 toward their normal level.
— Existing home sales: 47% of the way back from their low in Nov 2008 toward normal.
— Delinquency + foreclosure rate: 32% of the way back from their high in Jan 2010 toward normal.
To get to a single number that’s easy to remember and track over time, we just average these three percentages together. If all three indicators were at their worst, the barometer would be at 0%; if all were back to normal, the barometer would be at 100%. The February 2012 data puts us at 34%: in other words, the housing market is one-third of the way back to normal.
So, are we there yet? No. We still have a long way to go. How long will it take us to get there? Using the same method and measures, one year ago the market was 16% of the way back to normal, which means we’ve ticked up 18 points in the past year. If we continue to drive at this same pace of 18 points a year, we’ll get from 34% today to 100% in late 2015. Kids, sit tight…it’s going to be awhile.
March marks the start of the housing season. Prices peak in May, sales in June, and inventories in July. In colder regions, seasonal swings are bigger, and the market peaks later.
The housing market rides the seasons. Year in and year out, market activity has predictable ups and downs. Sometimes those seasonal patterns are hard to see when longer-term trends (like plummeting housing prices) or one-off events (like the homebuyer tax credit) drive movements in prices, sales and other housing indicators. But seasonal patterns are there, even when they’re beneath the surface.
To understand the effects of long-term trends or one-time events on the market, housing wonks like to “seasonally adjust” data. That means we strip out the regular seasonal patterns in order to highlight trends or events. This is useful for deciding whether the market is really in recovery or assessing the impact of a housing policy.
But these seasonal patterns help show us what’s really going on in the housing market, which is important because they give us hints about when we should search, list, buy, sell or build. In this post, I look at five measures of housing activity: search activity (Trulia), asking prices (Trulia), new construction starts (Census), existing home sales (NAR) and housing inventory (deptofnumbers.com).
Starts and Sales Swing with the Seasons
New construction starts and existing home sales fluctuate more throughout the year than other housing activities. The chart below shows that sales are typically 29% above their annual average in June and 31% below their annual average in January. Construction starts also swing 25% above and below their annual average over the year. No wonder builders and agents say theirs are seasonal businesses. Other activities float rather than swing with the seasons. Search activity rises 12% above its annual average in March. But inventories stay within 10% of their annual average every month, and asking prices stay within 5% of their annual average every month (see note below on asking prices).
The Spring Thaw Comes First to Buyers, then to Sellers
As the market comes out of winter hibernation, buyers wake up first. The table below shows when each measure hits its highs and lows. In the winter, all activity rests: searches, prices, starts, sales and inventories all slide to their yearly low in December or January. Life resumes in March, as search activity pops up and stays above normal through August. Prices rise too and reach their annual high in May. Summer has endings and beginnings: sales peak in June, as do new construction starts. But inventory keeps climbing as some sellers miss the sales peak, topping out in July and August.
What do these patterns tell us? Homebuyers are a little ahead of sellers. Asking prices peak at the start of the season, so demand appears to rise ahead of supply. As supply catches up, prices ease back down and sales peak. After that, inventories build up a bit further through the summer.
High-Season Comes Stronger and Later in the North
Harsh climates fuel seasonality. It’s harder to build homes in the snow, and a lot less fun to go to open houses (or host them). Construction starts in the Midwest are 2.5 times higher in June than in January, but in the South, construction starts are only 50% higher at the summer peak than at the winter low. Sales seasonality too is stronger in the Midwest and Northeast than in the South and West.
The best time to buy or sell? Depends on where you are. If you want to buy when inventory swells (or want to avoid those months for selling), inventory peaks in the summer across most of the country, but not in the Sunbelt. In Miami, Tampa and Orlando, inventory peaks in March; Las Vegas inventory peaks in October, and Phoenix inventory peaks in December – just in time to buy a home for Christmas.
Looking to buy low or sell high? Nationally, asking prices peak in May and bottom in December, so sellers can get top dollar in the spring, while buyers can find bargains later in the year. In other words, buyers should be more patient than they are, while sellers should move faster to get their home on the market. But prices tend to peak earlier in the South, as the map below shows, and later in the North, so the best deals come later in the year the farther North you are. And the harshest climates create the biggest swings: prices for similar homes vary more with the seasons in Minnesota, Illinois and Maine than in any other state.
— All data presented are the seasonal factors from the Census X-12 seasonal adjustment model, applied to at least five years of unadjusted raw data from each source. As each data source allows, I estimated separate seasonal factors for each metro, state, or region as well as for the US overall.
— Asking-price data from Trulia.com are adjusted for housing characteristics and neighborhood attributes. Therefore, the seasonal pattern in asking prices is not affected by seasonal changes in the types of homes that get listed.
Nationally construction is looking up -- but some places are hot while others are not.
Things keep looking up for the construction industry. New construction starts in January were 10% higher than one year ago. Confidence among builders jumped this month to the highest level in four years, even though it’s way below where it was before and during the housing boom. And construction jobs are on the rise too, growing faster than the U.S. economy overall.
But housing markets are local. In some cities you hear the sweet sounds of hammers and backhoes, but others cities are silent. Building-permit data from the last quarter of 2011 – the most recent available – show where construction is hot and where it’s not. Where it’s hot, new homes will add to the existing inventory, giving buyers more choices. Where it’s not, buyers will have to look at existing homes, and construction workers will have to hope for better news next quarter. Here are the winners and losers in new construction:
The November jobs report was good news for the economy and even better for housing: unemployment among 25-34 year-olds fell to 9.2%, and quarterly job growth in “clobbered cities” was strong at 1.9% (annualized rate). However, construction employment slipped.
Economic recovery is essential for housing demand to pick up. But three indicators in the monthly jobs report tell us whether the recovery in housing demand is underway, approaching or still far off. These include:
Construction job growth
Construction jobs are at the heart of the virtuous or vicious cycle that connects jobs and housing. Housing demand leads to more jobs in construction and related industries, and more jobs means more income and housing demand.
In November, construction employment fell month-over-month and grew just 0.3% versus 3 months ago, compared with total employment growth of 1.3% (seasonally adjusted annualized rates). Total employment is up 1.9% from its recession low, but construction employment is up just 0.8% from its bottom in January 2011 (cumulative rates). Construction employment still has a lot of catching up to do to get back even to its pre-boom share of overall jobs.
Unemployment among 25-34 year-olds
Between the ages of 25 and 34 is prime time when many people form households with a spouse, partner, roommate, or by themselves, then start families and buy their first home. During and after the recession, household formation dropped for this age group, and more of them than ever are living with parents or other adults rather than renting or owning their own place. These folks will wait to form their own households and consider homeownership only when their job prospects improve. A key measure for housing demand and homeownership is the unemployment rate for this group and the share of this age group that is employed.
In November, the unemployment rate for 25-34 year-olds dropped sharply to 9.2% from 9.8% in October and is at its lowest level since early 2009 (except for a one-month dip this March). The unemployment rate for all adults also dropped, from 9.0% to 8.6%. In November, 73.9% of 25-34 year-olds were employed (the rest are unemployed or not in the labor force because they’re in school, discouraged from looking, or not looking for other reasons), up from lower September and October levels, so the unemployment drop is not primarily due to young adults leaving the labor force.
But the job market remains tough for this key age group: before the recession, unemployment for 25-34 year-olds followed the overall rate pretty much exactly, but has remained stubbornly above the all-adults rate even as the unemployment rate has drifted down slowly.
Job growth in “clobbered cities”
The housing bust had unequal effects nationally, with many local markets in Florida, the Southwest, inland California and Michigan facing some of the largest price declines and highest vacancy rates. Job growth anywhere will boost housing demand, but compared to other places, these clobbered cities are in more desperate need of motivated homebuyers to help their local housing markets recover. We define “clobbered cities” as metro areas where home prices dropped at least 30% during the bust (according to the Federal Housing Finance Agency house price index) and where vacancy rates are still over 7% (excluding seasonal or vacation homes, according to the 2010 Census). Metro-level BLS data are released several weeks after the national data, so this indicator is for the previous month.
Job growth in clobbered cities grew 1.9% in October relative to three months ago (seasonally adjusted annualized rate, preliminary figures). The comparable national figure for October was 1.3%, so these clobbered cities had faster job growth than the U.S. overall. That’s a big change from the recession, when job growth in these metros was far worse than the national decline.
Among these clobbered cities, job growth was especially high in Riverside-San Bernardino, Phoenix, and Tampa, but other Florida metros – like Jacksonville and Orlando – lost jobs in the last quarter. And Detroit-area employment contracted by an annualized rate of almost 6%.