Are We There Yet? Freddie Mac Says Recovery Has Ways to Go

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The housing market turned the corner in 2012 Freddie
Mac’s economists said today, and the recovery was fully underway in 2013.  But despite the positive trends in home price
indexes, housing starts, and home sales, when can we say that housing has fully
recovered? 
Chief Economist Frank E. Nothaft and Deputy Chief Economist Leonard Kiefer attempt to answer that question in the
January edition of Freddie Mac’s U.S. Economic and Housing Outlook.

The two say that for the economy and housing market to
be functioning normally we need to see four positive indicators; a healthy jobs
market with low and stable unemployment, mortgage delinquencies back near
historical averages, home prices that are consistent with an affordable
mortgage payment-to-income ratio, and home sales in line with historical
norms. 

Since the
recession the labor market recovery has been modest with a December
unemployment rate of 6.7 percent, high by historical standards but moving
down.  Most economists agree that the
rate should be between 5 and 6 percent for an economy at its long-run potential.  Nothaft and Kiefer say it may be another two
years before that is achieved.

 

 

Mortgage delinquency rates have been falling rapidly recently but
remain well above historical norms of less than 2 percent, standing at 5.88
percent in the third quarter of 2013. 
The two say that with continued improvement in the labor market and
increasing house prices the delinquency rate should continue to fall but will
not be back to normal for some time. 

 

 

The economists
say that we saw in the last decade that home prices that rise too rapidly are
not sustainable; they should instead rise more or less in line with
income.  As mortgage payments are a
factor of both home price and interest rates, increases in either will affect
the price of a house a typical family can afford.  As the chart below shows, between 1999 and
2006 the payments on a hypothetical 30 year fixed rate mortgage increased by 50
percent more than incomes did, in large part because of house price
appreciation.  Right now the
payment-to-income ratios are only 60 percent of the level that existed in 1999
suggesting that fixed rate loans will generally remain manageable for a typical
family’s budget even with some additional increases in prices and rates.

 

 

Home sales have
increased over the past two years but are still way below sales a decade
ago.  Historically home sales have
averaged a rate of about 6 percent of the housing stock each year but rose to 9
percent during the housing boom then dropped to 4 percent with the housing
crisis.  The economists expect a pace of
5.7 percent for 2013 but homes for sale are constrained in some areas as potential
sellers remain without sufficient equity to sell.  This is holding back the recovery of the
overall sales market.  Many of the home
sales in the last few years have been cash so even as sales climb the lending
recovery has been muted.

 

 

So, Nothaft and Kiefer say, we aren’t
there yet
; the housing market hasn’t fully recovered, some markets are
recovering faster than others, and the recovery is likely to slow as interest
rates move higher.  But it is moving in
the right direction, they say, and they will continue to monitor the four key
indicators in the coming year.

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