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US Housing Market Improving, Recovery Taking Hold

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While the recovery of the labor market is well below its potential, the housing market is poised to overcome.

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Here we go again. The political ping-pong in Washington has once again impeded any resolution leading to certainty regarding fiscal policy, and therefore continues to limit the potential of the labor market recovery. As a result, household formation rates remain below potential and continue to act as a drag on the nascent housing recovery and consumer spending. However, despite the leadership deficit and its economic consequences, there is no denying it -- a long-term expansion in housing is taking hold.

First and foremost, even at current, below-trend household formation rates, the inventory of vacant housing units will be reduced to pre-crisis levels over the next three years even if housing starts continue to grow at double-digit rates (source: US Trust Capital Market Outlook December 3, 2012). See the chart below.



(Sources: US Trust Capital Market Outlook 12.03.2012 – Census Bureau; Bureau of Economic Analysis/Haver Analytics)

The increase in the sales absorption to new construction ratio is evident in that completed new homes only spend an average of 5.9 months (source: US Trust Housing Focus July 2012) on the market. This metric should continue to become more favorable as years of below-trend investment in residential real estate (see chart below) have led to considerable pent up demand. We could see this demand come into the market much more quickly, if only our leaders in Washington would help raise the cloud of policy uncertainty and allow hiring to pick up.



(Sources: US Trust Housing Lift Off July 2012 – Bureau of Economic Analysis/Haver Analytics/US Trust Estimates 2012-2013)



Another factor supporting the housing recovery is that home prices have fallen to a point where it is substantially cheaper to own than to rent. The chart below shows the ratios of home prices to rents and to median family income. The combination of lower prices and extremely cheap credit mean that barring a severe self-induced recession more rational consumers should continue to overcome their "housing hangover" at a faster rate and get back to buying real estate.





(Source)

As a result, we have begun to see prices stabilize and even begin to increase nationally. Continual home-price increases are critical to a sustainable overall economic recovery as they have a powerful positive effect on household balance sheets and consumer confidence and thus are a key driver of consumer spending and future economic expansion.



Source: US Trust Housing Liftoff July 2012 – Corelogic; Federal Housing Finance Agency; National Association of Homebuilders; National Association of Realtors, Standard & Poors/Haver Analytics

So, while the recovery of the labor market is well below its potential, the housing market is poised to overcome. Strengthening fundamentals resulting from years of below-trend investment, favorable demographics/household formation rates, and cheap credit combined with prices at generational lows mean that not even the best effort from our elected officials should be able to stop what should be a slow but consistent improvement in the housing sector.

Twitter: @joshuaschroede2

Editor's note: This article originally appeared on investing and economics site, See It Market.
No positions in stocks mentioned.
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