What the Heck is Going on in the Housing Market? It's Confusing at Best.

If you haven’t noticed, the national dialogue has shifted its schizophrenic eye towards the housing market again. Newfound optimism motivates headlines such as “Home Builder Confidence Takes Biggest Jump in Nearly 10 Years” on the Wall Street Journal’s homepage. However, this market is notoriously difficult to analyze, and its multitude of statistical indicators make it that much easier to misunderstand.

First, the good news: homebuilder confidence really has risen a lot. The National Association of Home Builders said its housing market index rose to the highest levels since March 2007 (right in the height of bubble-delusion), and at the fastest pace in 10 years. This number is especially important, because it cements the link between the housing market and the rest of the economy. Historically, the housing market has led the country out of recessions, not least because it employs so many people and so much capital. This is also why it tends to lead recessions; remember in the depths of the recession in 2009, unemployment in the construction industry was a whopping 20 percent.

 This number also implies an increased demand for housing; builders wouldn’t feel good unless they suspected people wanted to buy their products. This is good, because it suggests that we’re getting over our foreclosure glut – which was swamping the housing market, keeping prices low, hurting consumer confidence, and sucking up people’s disposable income in the form of mortgage debt.
However, we’re not through the fire yet. Despite the great shift in trend, the latest estimates are that more than 20 percent of properties with a mortgage are underwater, and the amount of underwater mortgage debt still totals roughly $1 trillion.

Housing starts (real new home construction) rose by almost 7 percent in June to 760,000, the greatest number since the recession began in October 2008 and 23 percent higher than this time last year. Another related indicator, building permits, remained around 755,000 after spiking in May and a modest fall in June; this is a full 20 percent higher than June, 2011. These permits are direct evidence that builders sense, and are banking on, future demand.

In last week’s congressional testimony, Chairman Bernanke mentioned the progress: “We have seen modest signs of improvement in housing,” he said. (Remember, the Chairman of the Fed does not speak lightly.)

 Another vital number you may be hearing a lot about right now is the mortgage rate. Mortgage rates are at record – and I mean record – lows right now.

This number, however, is really not an indicator of the housing market – it simply reflects the persistently low US bond yields these days. In other words, investors value the stability of US debt so much that they’re willing to accept extremely low interest rates in return for it. What does this mean for you as a homebuyer? These historically low rates are passed on to you in the form of historically low mortgage rates. By back-of-the-envelope calculations, a 7 percent interest rate means a monthly payment on a 30-year mortgage for a $500,000 home is $3,326. In today’s (conservative) 4 percent, that number is a mere $2,387 – 28 percent lower!

Unfortunately, this is all placed against the backdrop of confusing and seemingly contradictory sales numbers. While confidence indicators are all up about 20 percent from last year, housing prices have declined by 3.2 percent, after a small spike in May. Meanwhile, transaction volume was up about 15 percent. What seems strangest of all is the continued fall in prices as transactions – and thus demand – rises. However, this exact trend was reversed just last month!

The take home story here seems to be that the national housing market is extremely fractured right now, making broad-brush stories impossible. For example, the decline in new home sales mentioned above seems to be driven by a huge decline of 60% in the north-east – possibly the result of an early spring that pushed the beginning –and end – of the shopping season forward. The D.C. suburbs in northern Virginia is just such a unique area that can’t really be captured in generalizations from national numbers. A perfect example of this is the stories I hear from friends and family that live in different parts of the country. They tell me stories of homes that have been on the market for 4 years with no chance of being sold in the near future. I can't imagine that in Northern Virginia where I am seeing homes sell quickly if priced right. So stay tuned when I crunch next Tuesday’s Case-Shiller numbers for the DC metropolitan area!

Thank you, Samuel Moyer, for helping me understand the housing market from an economist's viewpoint and contributing greatly to this blog post.

Ellen Moyer 
Realtor with RE/MAX Allegiance
ellen.moyer@rmxtalk.com  
www.ellenmoyer.com