Last week, Trulia Chief Economist Jed Kolko explained what he calls Phase Three of the Housing Recovery. Each month, via Trulia’s Housing Barometer, Kolko reports on the progress of the housing market recovery. This particular entry provides some great insight on just how far we’ve come.
With the market 64 percent back to normal, Kolko says the recovery has entered a new phase as mortgage rates rise and inventory expands. However, while prices and existing-home sales are near normal, construction and new-home sales have a long way to go.
In order to provide his monthly update, Kolko summarizes three key housing market indicators: construction starts (Census), existing home sales (NAR) and the delinquency-plus-foreclosure rate (LPS First Look). For each indicator, he compares the current month’s data with how bad the numbers got at their worst and their pre-bubble “normal” levels.
In July 2013, all three indicators improved: construction starts and existing home sales rose, while the delinquency and foreclosure rate notched downward:
• Construction starts increased but still have a long way to go. Starts were at an 896,000 seasonally adjusted annualized rate – up 6% from June but slightly below the average rate from the first six months of 2013. Year to date, single-family and multi-family starts rose 20% and 33%, respectively, above last year’s levels. Construction starts are 41% of the way back to normal.
• Existing home sales leapt to their second-highest level in six years. Sales jumped in July to a seasonally adjusted annualized rate of 5.39 million – that’s up 17% year-over-year, and up 31% year-over-year when excluding foreclosures and short sales are excluded. For the sixth straight month, inventory expanded, even after taking seasonality into account. Overall, existing home sales are 94% back to normal.
• The delinquency and foreclosure rate continued its retreat. The share of mortgages in delinquency or foreclosure dropped to 9.23% in July, the second-lowest level in almost 5 years. The combined delinquency and foreclosure rate is 56% back to normal.
Averaging these three percentages together, the housing market is now 64% back to normal, compared with just 36% one year ago, according to Kolko.
So the recovery is not only moving forward; it entered its third phase this spring:
• The first phase of the recovery began in 2009, when the housing market ended its free fall and both sales and construction started their long, slow climb back from the bottom.
• The second phase began in early 2012, when home prices bottomed and started their steep rebound.
• We are now in phase three, which began in spring 2013, after inventory bottomed in January and mortgage rates started to rise in May. Both are making their climb after reaching historic lows, while price gains are slowing down. Existing-home sales have returned to near-normal levels, as have prices, which now look just 5 percent undervalued.
The fourth phase – which will begin when young adults finally start moving out of their parents’ homes, boosting household formation – is yet to come. Until this happens, construction and new home sales will remain well below normal – even though prices and existing-home sales are now very close to their normal, sustainable levels.
Along with the Housing Recovery Barometer, Kolko also started Trulia’s Bubble Watch in May, which looks at the price-to-income ratio, the price-to-rent ratio, and prices relative to their long-term trend, using multiple data sources, including the Trulia Price Monitor, as a leading indicator of where home prices are heading.
As stated earlier, Kolko estimates that national home prices are 5 percent undervalued in the third quarter of 2013 (2013 Q3). During last decade’s housing bubble, prices were as high as 39 percent overvalued in 2006 Q1, then after the crash fell to 15 percent undervalued in 2011 Q4. One quarter ago (2013 Q2) prices looked 7 percent undervalued; one year ago (2012 Q3) prices looked 14 percent undervalued.
He makes the point that even though prices look less undervalued than last quarter or last year, the current price slowdown means our chances of avoiding the next housing bubble just got better – noting that if price gains fall back in line with the current modest increases in income and rents, prices would stay close to their fundamental long-term value and wouldn’t get too overheated.
All in all, that’s some of the best news I’ve been able to share for quite some time now!
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Pillars of the Community: Recently Gary Mayor Karen Freeman–Wilson joined a team of volunteers with the final installation of vinyl siding for a Habitat for Humanity of Northwest Indiana home located at 635 Tyler Street in Gary.
The future home of Habitat partner Carla Keaton, her daughter and grandchild will be complete in October.
“I was very excited to learn that the Mayor was actually going to be working on my home,” Keaton said. “When I found out I was like WHOA! The mayor is coming to work on MY house? I felt kind of special.”
This was the Mayor’s first time on a Habitat build, and she expressed interest in returning to the Tyler Street house to help paint.
If you are interested in volunteering on a Habitat build, please contact Volunteer Services Coordiantor Kristin Marlow-Kellemen at 219-923-7265 ext. 316. You can also visit the Habitat for Humanity of Northwest Indiana website at nwihabitat.org for the complete build schedule.