For Housing, a New Definition of 'Normal,' and a New Index to Track it

Freddie Mac and its economists would like to answer the old question "are we there yet?" with "there" in this case meaning anywhere close to a normal housing market.   As part of that goal, the company today premiered a new tool, the Freddie Mac Multi-Indicator Market Index (MiMi).  This new publicly-accessible tool monitors and measures the stability of the nation's housing market, as well as the housing markets of all 50 states, the District of Columbia, and the top 50 metro markets.

MiMi uses proprietary Freddie Mac data, combining it with information on local markets in order to calculate a range of equilibrium for each single-family market tracked.  The user will be able to see at a glance where each market stands relative to its stable range and where each market is trending in relation to that range - is it falling away by failing to generate enough demand to balance the market or by overheating to an unsustainable level.

Freddie Mac's Chief Economist Frank E. Nothaft said it has been more than seven years since the beginning of the deepest housing recession since the Great Depression and the nervous speculation about when, if ever, housing would get back too normal.   "Given the pickup in sales, new construction, and home values over the past couple of years, it's fair to ask if we're there yet: is the U.S. housing market back to a normal range of activity with a good balance between demand and supply forces?"

"MiMi is the right housing index at the right time as we once again transition to a purchase-dominated housing market," Nothaft said.  "With recent history demonstrating that housing activity differs substantially from market to market, MiMi offers a fresh perspective on housing at the local level just as we are entering this new purchase market landscape. MiMi helps to pinpoint each market's 'sweet spot' by focusing on local housing differences while also tracking the fundamentals necessary for a stable market. MiMi draws from multiple data sources -- including Freddie Mac proprietary data generated through our daily business with more than 2,000 mortgage lenders across the country -- to create current insights into how the housing market at the national, state, and local level is trending."

Data used by MiMi to assess where each market is relative to its own long-term stable range includes home purchase applications, payment-to-income ratios (which allows measurement of changes in home purchasing power), proportion of on time mortgage payments, and the local employment picture. The four indicators are combined to create a composite MiMi value for each market.

Nothaft said that housing is clearly stronger today than at any point since the Great Recession began with home sales up 13 percent from the 2009 trough, housing starts up 55 percent, and serious delinquencies down 32 percent.  The unemployment rate has dropped nearly three percentage points, "though at a stubbornly slow pace."   But he asks, "Has the market recovered, is it still recovering, or (as some claim) is it overheating into a new bubble?"

Developing MiMi meant reviewing the various definitions of a "normal" housing market.  The economists rejected definitions pegging normal to the peak of the last market as too vague, since peaks are inherently unstable, and unhelpful from a responsible business perspective, using instead current and historic data to define a "normal" market as one where there is a stable range of housing activity. They then used this stable definition for each market to create an index which can measure, monitor, and graphically show where each is today in relation to their stable ranges and recent past.

Today's inaugural index highlights several key findings about the current state of the national's housing market as of this past January.

• The national MiMi is -3.08 points which indicates a weak housing market overall. This is an increase of 0.03 point from December to January and 0.81points from one year ago. The nation's housing market is improving based on its 3-month trend of +0.17 points and moving closer to its stable and in range status. The nation's all-time MiMi low of -4.49 was in November 2010 when the housing market was at its weakest.
• Eleven of the 50 states plus the District of Columbia are stable and in range. North Dakota, the District of Columbia, Wyoming, Alaska, and Louisiana rank as the top five.

• Four of the 50 metros are stable and in range, San Antonio, Houston, Austin and New Orleans.
• The five most improving states from December to January were Florida (+0.11), Tennessee (+0.11), Michigan (+0.09), Louisiana (+0.07), Nevada (+0.07), and Texas (+0.07). From one year ago the most improving states were Florida (+2.12), Nevada (+1.84), California (+1.26), Texas (+1.06) and D.C. (+1.05).
• The five most improving metros were Miami (+0.11), Detroit (+0.10), Orlando (+0.09), San Antonio (+0.09), and Chicago (+0.08). From one year ago the most improving metros were Miami (+2.54), Orlando (+2.08), Riverside (+1.87), Las Vegas (+1.81), and Tampa (+1.77).
• Overall, in January of 2014, 25 of the 50 states plus the District of Columbia are improving based on their 3-month trend and 35 of the 50 metros are improving.

Freddie Mac Deputy Chief Economist Len Kiefer said the first MiMi illustrates some themes for the nation's improving housing markets.  Many show a better employment picture along with some income growth making it possible for more people to buy a home while staying within reasonable debt-income ratios on their mortgages.  "But some high cost markets are already starting to feel an affordability pinch," he said, while at the same time, "those markets with a strong energy-related presence are posting solid house price gains supported by employment and wage growth. Conversely, many markets are still in recovery mode with ground to make up."  Kiefer said that only four of the 50 metro areas tracked by MiMi are in range with this issue, but 35 are improving and as the spring homebuying season rolls out, "we hope to see recent trends continue with more markets moving closer to their long-term stable range."