The housing crisis has left a lasting mark on the U.S. economy. Six years after the market peak in 2005, home prices continue to falter in some areas of the country, volumes remain low, and many investors and potential homebuyers remain wary of the residential marketplace. In this edition of Strategic Spotlight, we examine recent data from the U.S. housing market to consider how they may figure into overall growth expectations going forward.

 

Housing by the Numbers

By all accounts, the housing market decline was exceptionally severe. From 2005 to 2010, sales of existing homes fell nearly 47%, from an annual rate of 7.3 million to 3.9 million. Monthly figures on construction of new houses fell 79% from their 2006 high, and monthly new residential sales plummeted 80%.¹ Meanwhile, average home prices fell about 39% nationally during this period, although in some regions the plunge was closer to 60%. 

More recently, the landscape has shown improvement. Home sales have regained some strength, with new home volumes up about 13% and existing homes up 27% from previous monthly lows. While such growth may seem insignificant after the drastic volume decrease, we see reassuring longer-term trends. Given the pattern of declines, we would first expect to see signs of stabilization before the appearance of real growth. Along these lines, rolling 6- and 12-month averages for existing home sales, after bottoming in mid-2010, have been relatively steady since then.

Ongoing Challenges

While there are bright spots, several factors could continue to inhibit significant progress in the housing market. For one, many potential buyers are “stuck” in their current homes because they are underwater on their mortgages—i.e., they owe more than their homes are worth. This may inhibit sales volumes and, in turn, continue to dampen prices. Also, with millions of Americans either directly affected by the crisis or witnessing its impact on others, many are hesitant to purchase a home or to risk “making the same mistake twice.”

Indicators Supporting Growth

Despite the headwinds, we believe a number of trends support the notion that a better housing market lies ahead. For example, the crash in new home construction actually bodes well in the sense that it could limit supply growth and support prices. In terms of demand, mortgage rates continue to be at tempting lows, thanks in part to Federal Reserve policies seeking low U.S. Treasury rates, and are expected to stay there for a considerable period. This could be additive as consumers regain confidence, and as renters become priced out of the increasingly tight rental market. Another important contributor is the fact that the private sector has added jobs for 20 consecutive months. The pace of job growth has been slow, but the trend is crucial to generating more demand among home buyers.

Where You Stand Depends on Where You Sit

For the individual home buyer, regional dynamics are of primary importance. Markets including Washington, D.C. and Los Angeles have rebounded considerably, but others, like Detroit and Las Vegas, continue to struggle. In aggregate, however, we believe there are indications that the worst is over for the housing market. We do expect progress to be very slow but believe that housing could provide some incremental GDP growth in the year ahead.

 

¹Source: FactSet.

 

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