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

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

The two say that for the economy and housing market tornbe functioning normally we need to see four positive indicators; a healthy jobsrnmarket with low and stable unemployment, mortgage delinquencies back nearrnhistorical averages, home prices that are consistent with an affordablernmortgage payment-to-income ratio, and home sales in line with historicalrnnorms.  </p

Since thernrecession the labor market recovery has been modest with a Decemberrnunemployment rate of 6.7 percent, high by historical standards but movingrndown.  Most economists agree that thernrate should be between 5 and 6 percent for an economy at its long-run potential.  Nothaft and Kiefer say it may be another twornyears before that is achieved.</p

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Mortgage delinquency rates have been falling rapidly recently butrnremain well above historical norms of less than 2 percent, standing at 5.88rnpercent in the third quarter of 2013. rnThe two say that with continued improvement in the labor market andrnincreasing house prices the delinquency rate should continue to fall but willrnnot be back to normal for some time.  </p

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The economistsrnsay that we saw in the last decade that home prices that rise too rapidly arernnot sustainable; they should instead rise more or less in line withrnincome.  As mortgage payments are arnfactor of both home price and interest rates, increases in either will affectrnthe price of a house a typical family can afford.  As the chart below shows, between 1999 andrn2006 the payments on a hypothetical 30 year fixed rate mortgage increased by 50rnpercent more than incomes did, in large part because of house pricernappreciation.  Right now thernpayment-to-income ratios are only 60 percent of the level that existed in 1999rnsuggesting that fixed rate loans will generally remain manageable for a typicalrnfamily’s budget even with some additional increases in prices and rates.</p

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Home sales havernincreased over the past two years but are still way below sales a decadernago.  Historically home sales havernaveraged a rate of about 6 percent of the housing stock each year but rose to 9rnpercent during the housing boom then dropped to 4 percent with the housingrncrisis.  The economists expect a pace ofrn5.7 percent for 2013 but homes for sale are constrained in some areas as potentialrnsellers remain without sufficient equity to sell.  This is holding back the recovery of thernoverall sales market.  Many of the homernsales in the last few years have been cash so even as sales climb the lendingrnrecovery has been muted.</p

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So, Nothaft and Kiefer say, we aren’trnthere yet; the housing market hasn’t fully recovered, some markets arernrecovering faster than others, and the recovery is likely to slow as interestrnrates move higher.  But it is moving inrnthe right direction, they say, and they will continue to monitor the four keyrnindicators in the coming year.

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