June 26, 2012 (Housing Market Monitor)
By Dean Baker
Permits on single-family homes are 19.9 percent above their year-ago-level.
The data released in June show more evidence that the housing market is on the mend. Perhaps the most impressive item on the list of positive releases was the May data on existing home sales. While many press reports misread this release because it showed a slight drop in sales from April, in fact, it was a hugely positive report.
It is important to remember that the existing sales data show closings. These are typically contracted 6-8 weeks before the closing. This means that the May sales were contracted in March and April. The prior months had seen unusually high levels of sales due to unusually good winter weather across much of the country. For this reason we should have expected a sharp falloff in sales in May. Instead, May sales were down by only 1.5 percent from their April level. They were 9.6 percent above the May 2011 level.
In fact, the 4,550,000 sales rate reported for May is really about as high as we should expect sales to go. The sales rate in the mid-90s, before the bubble began distorting the market, was less than 3.5 million. The population has increased by less than 20 percent over this period, which means that we should expect annual sales of less than 4.2 million if the sales-to-population rate had remained constant. New home sales are down by around 200,000 from their mid-90s level, but this still puts current sales levels at or above the long-term trend. Those who expect further increases in sales from current levels have their eyes on the bubble, not the longer trends in the U.S. housing market.
The price data in this report were also striking. These data are erratic and are often moved by a change in the mix of homes for sale, but nonetheless the May data showed the third straight large monthly price gain. The median house price in May was 17.3 percent above its February level and 7.9 percent above its year-ago level.
Permits for single family homes were up 4.0 percent in May from their April level and were 19.9 percent above their year-ago level. This is the highest rate of construction since early 2010 when the first-time buyers’ credit was temporarily boosting the market. Also, new home sales in May were at their highest level since the end of the first-time buyers’ tax credit caused a surge in April of 2010.
The Case-Shiller data for April provide further evidence of a turnaround. Seventeen of the 20 cities in the index had a rise in prices in April. In two of the cities with declines, Boston and New York, the drop was less than 0.1 percent. Only Detroit, with a 2.1 percent drop, had a substantial decline in prices. Still, Detroit prices are 1.4 percent above their year-ago level.
Phoenix, which saw the sharpest collapse of prices, is now again seeing rapidly rising prices. Prices rose 2.3 percent in April and have risen at a 33.5 percent annual rate over the last quarter. The largest price increases were in the bottom third of the market, with prices rising by 2.9 percent in April. They are now 22.2 percent above their year-ago level.
Even Chicago, which had been seeing rapidly falling prices driven by price declines in the bottom tier, saw a 0.5 percent increase in prices in April. Prices for homes in the bottom tier rose by 0.7 percent and have rising at 4.3 percent annual rate over the last quarter. Only Atlanta is continuing to see serious weakness in the bottom tier of its market with prices dropping by 1.3 percent in April. They are down by 24 percent from year-ago levels and 64.6 percent from their peak in 2006.
At this point all the signs that housing has hit bottom and started an upswing. It is unrealistic to expect sharp price increases, at least in most parts of the country, but house prices will likely rise at least in step with inflation and be a positive force in the economy.