Oh Yeah!

12.20.12

How Housing Is Driving Economic Growth

The latest data show more people are buying more homes at higher prices than they have in years. So why isn’t the supply of homes for sale rising?

We’ve been saying it for months. Housing. Is. Back.

People are buying more new homes, people are buying more existing homes, prices are rising, and the inventory of unsold homes is reaching multi-year lows. The National Association of Realtors Thursday released data on existing home sales and prices for November. Sales of single-family homes, condos and co-ops came in at a 5.04 million annual rate last month. That’s the highest monthly sales rate since November, 2009. It represents a 5.9 percent jump from October’s 4.76 million rate, but more importantly, a 14.5 percent jump from 4.4 million in November, 2011.

This builds on Census Bureau data for November showing that housing starts – i.e. the beginning of construction of new homes -- came in at an annual rate of 861,000. That’s a 3 percent drop from October’s rate of 888,000, which was likely caused by a temporary slowing in construction due to Hurricane Sandy. From November of last year, however, housing starts were up 21.6 percent, and they’ve been up on a year over year basis every month in 2012.

With buying activity picking up, housing are staying on the market for less time and there are fewer homes waiting to be bought. This all means going forward, building should pick up as people’s eagerness to buy finally beings to overwhelm the significant left over inventory from the housing boom. According to the NAR, the total housing inventory fell to a mere 2 million homes available for sale. Given the rate at which homes are being bought, that represents a meager 4.8 months supply, compared to 5.3 months in October. The inventory is reaching levels not seen since right before the housing boom entered its truly overheated phase: November’s inventory was the lowest since September of 2005, when there were only 4.6 months worth of homes on the market.

Another positive sign: the market is starting to clear out foreclosed homes and homes sold at a discount from the outstanding amount of the mortgage (short sales). In November, 2011, foreclosure sales and short sales were 29 percent of all home sales. In November 2012, they were only 22 percent, down from 24 percent in October. Lawrence Yun, the chief economist for NAR, predicted in a statement that "The market share of distressed property sales will fall into the teens next year based on a diminishing number of seriously delinquent mortgages." This bodes well for the economy as a whole. It’s better when home sales are a money-making proposition, not a way for deeply indebted homeowners to cut their losses or for banks to get back whatever they can from delinquent mortgages.

Housing is no longer a drag on the economy (as it was from 2006 through to 2011), but instead is growing faster than the economy as a whole.

This steady increase in sales and steady decrease in existing inventory means one thing going forward: more building. Data from the National Association of Homebuilders shows that builders are more confident in the strength of the market for single-family than they have been since April, 2006. The NAHB data measures both the current sentiments of builders and their future prospects. The former is at such high levels now because some builders are starting to make money hand-over-fist again. Toll Brothers, the high end builder, saw huge profits driven nearly entirely by new building.

In a statement, the company’s CEO, Douglas C. Yearley Jr. said that "pent-up demand, rising home prices, low interest rates, and improving consumer confidence motivated buyers to return to the housing market in 2012.” The best performing stock of the year so far has been Pulte Group, another home builder. Its stock has quadrupled in value since July 2011 and has gone up by almost 180 percent since the beginning of this year.

Prices tend to rise when demand rises in comparison with supply. And that is plainly happening now. With fewer homes on the market, buyers are now competing. The median price for an existing home was $180,600 in November, according to NAR, up just over ten percent from a year ago. This is part of a real, long-term trend: Novemeber is the ninth consecutive month of year-over-year median price increase. That hasn’t happened since the period between September 2005 and May 2006. The Federal Housing Finance Agency’s  housing price index, which has only been updated through October, shows home prices up 5.6 percent over the year, which would put them at roughly pre-boom levels from July, 2004, and still 15.7 percent below the index’s April 2007 peak.

The effect of the housing comeback is evident in the economy as a whole. The most recent gross domestic product figures from the Census Bureau show that housing is no longer a drag on the economy (as it was from 2006 through 2011), but instead is growing faster than the economy as a whole. The latest figures show that the economy grew at a 3.1 percent rate in the third quarter of this year, while “fixed residential investment,” which is another way of measuring the overall housing sector, grew at a 13.5 percent annual rate. In 2010, by comparison, the whole economy grew 2.4 percent, but fixed residential investment shrunk 3.7 percent, after contracting by 22.4 percent in 2009.

Merry Christmas. Ho-Ho-Home.