What Does a Healthy National Housing Market Look Like?

By: Jann Swanson •

Freddie Mac's economists today used the analogy of a patient with a high fever to talk about the recent course of the housing market.  In the November 2012 Economic & Housing Market Outlook, Freddie Mac likened that patient's 103° temperature to the height of the housing boom in 2006.  The patient collapsed, the Outlook reported and "after a difficult period of convalescence, how seems to be getting better."   Indicators such as housing starts, sales, and prices are rising while the negatives of delinquencies and foreclosures inventories are trending down.  Freddie Mac's Chief Economist Frank E. Nothaft asks "What does a national housing market look like at a healthy 98.6 degrees?"

The answer to the question requires a comparison with the market today to that in the years before the peak itself.  Today we are looking at:

  • The S&P/Case-Shiller 20-city and Federal Housing Finance Agency's purchase-only house price indexes have both shown seven consecutive months of seasonally adjusted positive gains through August.
  • Freddie Mac's own house price index was up 4 percent in September over the same month in 2011 and other geographically broad based increases in 44 states and the District of Columbia.
  • Residential construction was up 26 percent in the first nine months of this year compared to the same time last year.
  • Home sales were at a rate of almost five million units for the first nine months of 2012, a 9 percent increase from the same period a year ago.
  • Homeowner and rental vacancy rates have declined to 1.9 percent and 8.6 percent, respectively.

On the downside, unemployment remains in the high 7-percent area and family-income growth is modest.  Housing demand has remained subdued, and the pace of household formations was running at an annual rate of 0.5 percent over 2007- 2011, less than one-half the 1990-2006 average of 1.2 percent per year.   Over the past four quarters however it has returned to a 1 percent growth rate which translates into about 1.15 million new households over the past year.

Freddie Mac said today that a diagnosis of a healthy market must take into account demographic shifts.  "Generation Y" appears to be delaying household formation and home purchase by remaining in their parent's home longer while the "Baby Boomers" are now looking at not only the younger generation living with them, but also their own retirement.   Consequently fewer are likely to be move-up buyers and may delay a move to a retirement home.   There is also the declining rate of both foreclosures and delinquencies.  "If we put these additional factors into play," the Outlook says, "what a healthy housing market should look like will dismay those who keep comparing housing to its peak years of 2004-2006."  Looking at long-term trends here's what a healthy housing market should look like in the next five years:

  • Housing starts increasing to about 1.7 to 1.8 million dwellings per year (compared with 2.1 million in 2005)
  • Home sales increasing to about 5 percent of the housing stock, or about 6.5 to 7.0 million homes per year (compared with sales of 7 percent of the stock in 2005)
  • U.S. house price appreciation rising gradually to about 3 percent per year (compared to 11 percent of 2005).
  • Vacancy rates easing further to about 1.7 percent on for-sale homes and 8 percent for rental homes (down from peaks of about 3 percent in 2008 and 11 percent in 2009, respectively).
  • Serious delinquency rates nearing 2 percent (down from a peak of 9.5 percent in early 2010)

"To sum up: taking into account recent trends, key housing indicators and the shifting demographic patterns that will define a new and realistic trajectory toward a healthy housing market, the long- term prognosis is promising. In the immediate future, however, the market's recovery will be tempered by continued high unemployment, modest income growth, and a subdued pace of household formations. In other words, the patient is on the way back to health, but don't expect the housing market to wake up at 98.6 degrees tomorrow morning."