Tuesday
September 23, 2014

Taking the Long View on Recovery

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Taking the Long View on Recovery

Home sales are sputtering because of a lack of inventory.

No industry is more cyclical than the housing sector. Changes in job growth and mortgage rates can have a big impact on whether home sales rise or fall. Today, after two years of solid growth, home sales appear to be hitting a soft spot. But that doesn’t necessarily mean the recovery is over.

Compared with previous cycles, hitting a soft spot only two years into a recovery is unusual. That’s because the country’s steady population growth typically boosts demand for home sales after a  downturn. We saw this in the three housing recoveries since 1970. These recoveries were multiyear phenomena of seven, five, and 14 years (the boom).

This time, the expansion seems to be sputtering after only two years. Why? It doesn’t appear to be a lack of demand. We’ve seen a build-up of potential buyers from the creation of 2.4 million jobs over the past 12 months, as well as continuing low interest rates (4.2 percent as of early summer), and the pent-up demand from young adults living at home longer or doubling up with friends.

The difference between this and previous recoveries is on the supply side. There simply isn’t enough inventory to keep the market growing. Just to keep pace with the growing U.S. population, we would need to see about 1.5 million housing starts a year, but since the downturn, we’ve seen the construction of new homes at levels well below half that.

Fortunately, we’re starting to see more homes being listed for sale. March and April inventory levels were higher this year compared with last year, and homebuilders are increasing their activity.

To be sure, the affordability side continues to face pressure. Home prices have been rising throughout the recovery, and credit standards remain tight. But there’s good news on both fronts. As more homes come on the market, the pressure on prices should moderate, and we expect future price gains to be in line with income growth. And we see signs lenders could dial down credit standards to more normal levels, in part because of the strong performance of mortgages originated in the last few years.

Therefore, all in all, a multiyear housing market recovery is still in the works if we discount the modest slowdown for this year.

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