Is the Housing Bust Over?
It was early 2006 that housing markets did their abrupt turnaround, transitioning from a period of increasing prices and sales to one where both prices and sales were in a near freefall. The fallout of the housing market bust has been well documented, and the boom-bust cycle is often cited as a leading cause of the current recession.
It’s been three years—is the housing market correction finally over? The short answer is probably no, but there are some encouraging signs of improvement.
Existing single-family home sales, by far the largest segment of the housing market, have been relatively stable for the past five months. Prior to a steep drop off in November, sales had held steady for roughly 14 months. This stability has come at a cost though, as the median price of homes sold has fallen drastically over the past year and a half.
Part of the reason that existing home prices seem to be falling so rapidly is that an increasing percentage of homes being sold are distressed. In April, the National Association of Realtors reported that just over half of March’s home sales were in this category. While this may not seem encouraging for homeowners, working off the bloated supply of foreclosures is an important step in the return to normalcy. So far, inventories of existing homes have yet to come down significantly, but with sales showing signs of stability, it appears that inventories may have turned a corner. In addition, the Mortgage Bankers Association reported that the percent of loans entering foreclosure fell in the second half of 2008.
New single-family home sales have also shown tentative signs of stabilizing over the past few months. However, since they began their decline in late 2005, new home sales have shown quite a few signs of stability over short periods, only to be followed by more declines. Of course, one might not expect new home sales to stabilize as rapidly as existing home sales, since an excess supply of homes usually means homebuilders will be adding fewer homes to the market. With fewer new homes on the market, there should be fewer sales as well. Looking at housing starts and the level of inventory for new homes, it is pretty clear that builders are scaling back. In fact, the current level of inventory is roughly in line with the average seen from 1980 to 2000.
Perhaps the most positive sign for housing markets is that the home-price indexes are beginning to suggest that price declines may be slowing. Both the latest S&P/Case-Shiller indexes and the FHFA index indicate some stability in the 12-month growth rate of prices as of February. The FHFA index shows prices actually improving in February, while the Case-Shiller index, which is narrower than the FHFA index in terms of geographic coverage but also includes nonconforming loans which the FHFA index leaves out, simply has prices falling at a slower pace.
While there are some tentative signs that the housing market is stabilizing, it is Important to note that things are still far from normal. Home prices, for example, are currently down 30.7 percent and 9.5 percent from their respective peaks in the Case-Shiller and FHFA indexes. Also, given the still-bloated inventories of unsold homes, it might be some time before things return to what we remember as normal. That being said, any positive signs in the market are certainly welcome after such a long period of dreary news.