The Beginning of the End for Housing

Housing in this country has come back from the depths of the last recession.  From an annual construction rate of barely over 400,000 new single-family homes started in early 2009, activity has risen more than 225 percent to an average of 1.3 million new home starts as 2015 ended.  More recent news, however, suggests that the bloom is beginning to come off the rose, not suddenly or everywhere but a warning nonetheless that this economy, if not yet at the end of its cyclical expansion, has entering its last phases.

Data from all sources document a slowdown in growth and in places an outright decline.  Certainly, existing single-family home sales offer a less than dynamic picture.  Though existing home purchases rose 7 percent last year over 2014, they have hardly climbed at all this year.  As of June, the most recent month for which data are available, existing home purchases barely exceed rates of last December, registering a rise of only 2 percent.  The supply of houses on the market meanwhile continues to fall.  As of June, it stood at 4.6 months supply at the current sales rates, down from the 5.1 months recorded late last year.  The construction of new single-family homes continues to grow apace, up over 13 percent so far this year on balance, but more recent figures show a decline from the seasonally-adjusted rates averaged last winter.  That sign of weakness prevails in all regions of the country, too.  As a further harbinger of softening, the construction of multi-family dwellings, whether for rentals or condominiums, has dropped some 10 percent from rates averaged late last year.

Deteriorating affordability suggests that this slowdown is fundamental.  Median sales prices of existing homes according to the National Association of Realtors (NAR) had already jumped about 15 percent between 2013 and 2015.  It jumped a further 12 percent or so by June of this year.  Even though mortgage rates have crept down on average from late last year, the cost of supporting a mortgage on the this now more expensive median-priced house has risen to 15.7 percent of the median family income, up a considerable 15 percent from late last year.  Considering all costs, the NAR affordability index for the nation has dropped some 4 percent from late last year and more than 10 percent from the levels of 2013 that had so supported the housing recovery.  This overall national picture prevails regionally, too, except in major coastal cities where sluggish foreign buying has made housing for the locals slightly less unaffordable than it was.

This constrained affordability should slow any further advance in this sector.  And since home buying to date has led the economy’s overall recovery, this slowdown suggests a parallel one in the nation’s real gross domestic product (GDP).  The only thing that might prompt greater housing activity despite deteriorating affordability is the formation of a bubble in real estate prices, which, as the nation learned in 2008, can only end in tears.  As it is, the picture is one of a gradual deterioration in the recovery’s already inadequate strength.

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