Some housing indicators show that the market’s bouncing back, but others do not. Time to recalibrate this housing recovery
Yes, real estate prices and existing home sales are on the rise. True, foreclosure activity continues to drop. But does this really feel like a bona fide housing recovery in full swing? Economic experts disagree.
It’s difficult to get a consensus on whether or not we’re in the midst of a lasting real estate rebound because key indicators aren’t exactly harmonizing well together, making it challenging to accurately evaluate the state of the housing market.
Not The Usual Suspects
One indicator that the recovery is proceeding abnormally is the recent decision by real estate website Trulia to retire its industry-respected Housing Barometer, which was first launched in February 2012 to chart how quickly the housing market was shifting back to normal.
This barometer used three key metrics to gauge housing market health: existing home sales, the delinquency-plus-foreclosure rate, and construction starts. While the first two indicators have showed positive signs, construction starts are only 40 percent of the way back to normal, according to Jed Kolko, Trulia’s chief economist.
Before the Barometer was retired, its last reading was “67 percent back to normal.”
Kolko says, “Prices have rebounded significantly, which is good news for homeowners who saw their property values fall during the housing crash. And home sales, which are … very close to the long-term norm, have recovered much faster than construction.”
He adds, “The biggest challenges are that many young people are still living with their parents, household formation has been slow, and the vacancy rate is still above normal. Those factors hold back construction.”
A Bigger Picture
Those three indicators are just part of the picture, says Lanny Baker, CEO of real estate listing site ZipRealty. He recommends that people look at as much data as possible to get an accurate picture of the market.
That “includes median sales prices, sold-to-list price ratios, total inventory, new listings, pending sales, distressed sales, median days on the market and percentage of homes sold in seven days or less,” Baker says.
Baker says this housing recovery is different from past rebounds because lenders are significantly more conservative in their underwriting standards in the wake of the subprime mortgage crisis and because more investors are involved in home purchases today.
Another huge factor is that the housing crash was part of the Great Recession, which affected many other parts of the economy. “When the real estate market went into free fall [a few years ago], it was the first time in most people’s memories that [home] prices went down nationally,” says John O’Connor, agent with Keller Williams Boston-Metro in Boston.
The precipitous drop in home equity and rise in unemployment made it incredibly difficult for the housing market to recover.
To better evaluate a market recovery today, one must consider the number of new households created each year, O’Connor says.
“Currently, we are forming only about half as many new households as normal, and the unemployment rate has been stuck at over 7 percent,” O’Connor says.
Back to Normalcy
In spite of these challenges, Baker believes a fundamental recovery of the housing market is underway.
“We’re not pushing into new record levels on transaction volume or sales prices in most parts of the country, so the word ‘recovery’ is really very accurate,” Baker says. “We are still working our way back from a major and historic downturn in housing.”
While home sellers, buyers and owners can glean some information from national housing indicators, it’s important to take these numbers with a grain of salt.
For instance, national media outlets report data that measures the aggregate of the housing market, not the local market that you live in, says Mike Shaw, lead buyer specialist with the Kelly Hager Group Real Estate Services in St. Louis. “It’s important to consult with your neighborhood expert on real estate conditions near you first, before listening to the national averages.”
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