The latest statistics on the housing market are indicating a solid recovery. Housing starts are up significantly, foreclosures continue to fall, and prices are recovering in most of the hardest-hit markets.
The health of the housing market is a major determinant of overall economic growth, and the most recent data is clearly trending up.
April housing starts stood at a seasonally adjusted annual rate of 1.135 million, according to a joint release by the U.S. Census Bureau and U.S. Department of Housing and Urban Development. This level is more than 20 percent above the March estimate and nine percent above April 2014. Building permits also shot upward by more than ten percent since March (and six percent since April 2014) to an annual rate of 1.143 million, indicating starts over the next few months may stay strong. This pace of building has not been seen since before the recession.
The housing market’s role in the Great Recession can hardly be overstated. In the mid-1990s, home prices began to rise sharply in some markets (concentrated in places such as Florida and Las Vegas). This price growth, due in part to loose underwriting and an unquenchable thirst for mortgage-backed securities and derivatives, was simply not sustainable. Any time speculation takes over and the wrong motivations are in play in a market, it’s a disaster waiting to happen.
When the bubble burst, prices fell, unemployment rose, and loans with escalating payments after a few years came home to roost, thus forcing millions of homeowners into default and foreclosure. With home values in many cases below mortgage amounts, there was no way out and the “bust” began to affect the rest of the economy, undermining the entire global financial system and ushering in the Great Recession.
Even with accommodative monetary policy conditions from the Federal Reserve and a healthy economic stimulus package, the economy shrank and millions of jobs were lost. To make matters worse, housing plays a major role in the business cycle and often tends to accelerate the trend. One of the reasons the recovery has taken so long is that housing has been slow to turn around. In past recessions, the housing market has usually bounced back much faster, helping spur growth in the overall economy.
Building a house generates economic activity across a spectrum of industries. Architects, engineers, designers, contractors, electricians, plumbers, roofers, drywallers, painters, and many more people may be working on the job. Purchases of everything from concrete to roofing materials are required. Salaries and wages earned will then be spent for another spectrum of goods and services. These ripple effects through the economy (which I have spent a good part of my 30-year career measuring) are substantial. At the same time, homeowners who see their equity rising are building wealth.
Without an assist from housing, the economy struggled to turn around after the recession. The sluggish economy and so-labeled “jobless recovery” in turn left many people unwilling or unable to purchase a home. Now, things are finally looking up. Credit availability is returning to a more rational level, after some understandable overkill in tightening after the malaise. With the U.S. job market sustaining decent growth for a while now and unemployment rates trending downward, we’re beginning to see the housing recovery pick up steam.
Not only are permits rising, but also foreclosures are dropping. According to CoreLogic, there were about 549,000 homes in the United States in some stage of foreclosure in January, down from 822,000 a year prior. The “seriously delinquent” rate stands at four percent, the lowest it has been since June 2008. The foreclosure inventory is now just 1.4 percent of the number of houses with a mortgage across the country, thus approaching normalcy.
Texas weathered the housing boom-and-bust cycle better than most parts of the country. We skipped the major escalation in price, and were spared the worst of the downturn. About 0.7 percent of houses with mortgages in the state are in the foreclosure inventory, a notably better proportion that for the nation as a whole.
When the housing market is healthy, consumer spending is encouraged and people are just generally more optimistic. In addition, the process of building new homes leads to economic benefits that ripple through the economy. One reason the Great Recession’s effects have lingered so long has been the extreme problems in the housing market, and the fact that the housing recovery is picking up steam is a highly positive signal.