By Eric Philo
Housing in the United States could be poised for a surprisingly robust recovery. Home price comparisons have improved for five months running, the best performance since the crisis began. A month’s supply of new homes is now below the average of the past 40 years. Consumer debt service ratios have fallen substantially. Homebuilder optimism has jumped sharply since last year. Past-due mortgages and foreclosure activity continue their orderly decline. Affordability of housing is roughly double the norm seen since 1989, thanks to price declines and extraordinarily low mortgage rates. Risks to U.S. (and global) growth are considerable, including the continuing European fiscal debacle, slower growth in China, high energy prices, a debt-to-GDP ratio that hems in U.S. fiscal options, and tax code uncertainty. Despite all of these pressures, the collective evidence supporting a strong recovery in housing, arguably the most important and powerful spur to economic recovery, cannot be ignored. We would argue that this is a propitious time to bring back the homebuyer tax credit.
With housing clearly turning, despite the continued presence of a variety of other risks in the economy, a credit would help cement the gathering momentum in home buying –- the most positive economic development since the great unraveling began in 2008.
Homebuyer Tax Credits of 2008 to 2010
Between 2008 and 2010, first-time homebuyers were offered an incentive to purchase homes (see Chart 1). The first program, set late in the Bush administration, required that buyers return the tax credit over time. Home buying continued to plummet. The incentives were changed under Obama, with the requirement to pay back the credit waived, as well as expanded flexibility and higher credits. As the chart below shows, home buying picked up and then sagged as the credit window closed.
At the time the credits were enacted, critics reasonably argued that offering credits was akin to trying to catch a falling knife. Now we have an incipient recovery, and the cost of reinstating the credits — $9 billion was what the last round cost, in total –- seems quite modest, considering the powerful effect a housing recovery has on the economy as a whole. When housing moves, it pulls along durables spending, spurs banking activity, increases labor mobility, builds confidence, confers a wealth effect (as long as prices are rising, which they are beginning to do), boosts overall retail sales and increases auto sales as household formation picks up. Also, while not caused by housing improvement, the same lower-rate environment that always precedes a housing recovery also spurs purchases of anything bought on credit, like durables. These purchases are aided and abetted by the wealth effect and higher consumer confidence that accompany a housing recovery. The impact of a housing recovery on overall economic growth is powerful. Housing leads the whole parade (see Chart 2).
Focus on Spurring Housing, and Jobs Will Follow
The immediate concern of policymakers around the world is job creation. Policy initiatives aimed directly at job creation, while not necessarily a waste of money, miss the mark. Fiscal policy should be aimed, first and foremost, at the housing market. Housing leads not only gross domestic product, but also employment, as shown in Chart 3.
Home Prices Now Rising Steadily
The latest S&P/Case-Shiller Home Price Index rose at a 2% annualized rate in March vs. April. This is the fifth-consecutive month of improvement, the longest such run since the crisis began (see Chart 4).
Noteworthy is that two of the most depressed markets in the housing crisis (Miami and Phoenix) are making huge, double-digit recoveries in pricing, as shown in Chart 5.
But an even broader cross-section of cities is showing unmistakable improvement (see Chart 6).
Home prices led the way down, and it is highly likely they will lead on the way up (see Chart 7).
|Months Supply, Debt Service Ratio, Builder Confidence All BullishHelping to drive higher home prices, the supply of homes has fallen dramatically, with months supply of new homes at about five months, materially below a 60-year average of about six months, as shown in Chart 8.|
Debt service ratios for households have fallen very significantly, and are now at levels not seen since the 1990s (see Chart 9).
The Wells Fargo Housing Market Index (HMI), a measure of builder optimism, has made a significant jump from its bottom (see Chart 10).
Trends are also improving doggedly in delinquencies and foreclosures, reflected in Charts 11 and 12.
Charts 11 and 12
Thanks to lower home prices — and especially lower mortgage rates — housing affordability is extraordinarily high, at an index level of more than 200. That compares with about 105 to 135 from 1989 to 2006, as shown in Chart 13.
Also worth noting is the extreme bottom reached in residential fixed investment relative to GDP — less than 2.6%, well off the 6.0% average, 1947 to 2012 (Chart 16). A more recent average from 1980 to 2005 — 5.3% — is still twice the current level. A recovery in residential investment to 5.3% of GDP would add 2.7% to total GDP, and of course, follow-on sales of durables and other economic activity spurred by a housing recovery would add very materially to GDP growth.
A Caution, and Frankly, a Good Reason to Prime the Housing Pump
Twenty million, or about 40% of the total 50 million outstanding mortgages in the U.S., are estimated by RealtyTrac to be underwater –- larger than home value (Chart 17). Here’s an example where it would be nice if we could force job growth to lead housing. Unfortunately, that would be unprecedented, and essentially, impossible.
As prices rise, this problem begins to lessen. Case in point is the rise in home values in Phoenix, where prices are up 20% annualized — from the bottom made in October 2011 -– a steep six-month climb.
– Eric Philo