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The recovery certainly looks secure. Signs of growth register across a broad front. Sales of both new and existing homes have risen, the former 10.2% during the last 12 months, the latter, more directly linked to new construction, up 10%.1 In response, the pace of home construction has picked up. The Commerce Department reports a jump of more than 30% in new housing starts during this time. The turn in sales has reduced outstanding inventories of unsold properties and, accordingly, has arrested the slide in real estate prices. Median prices for new houses nationwide have risen 3% during this same time. As is typical of cyclical turns, especially after such a dramatic correction, the greatest gains have occurred in the regions that were most hard hit. Sales in the west, for instance, have shown the greatest gains, up 55% during this 12-month stretch, mostly in Southern California, Arizona, and Nevada. Sales in the Midwest have jumped by more than 18%. Sales elsewhere have remained subdued.2
The overall picture is nonetheless encouraging, especially after the real estate disaster through which the country passed not too long ago. And fundamentals suggest that it will continue to improve. One crucial supporting factor is the Federal Reserve’s commitment to keep short- and long-term interest rates low. Even today, after a modest rise in longer-term Treasury yields, 30-year fixed mortgages remain on average at historically low levels of 3.74%, barely above recent and expected rates of inflation.3 More fundamental is the housing demand that has emerged and will likely continue to emerge from new household formation across the country, at a pace of just under a million a year, according to last measures by the Commerce Department. An additional positive factor is the fading memory of past losses and how recent real estate price increases, by raising house values above existing mortgages, have increasingly enabled people to sell and move and so offer real estate markets a dynamism that they lacked until recently. These last are, of course, unmeasurable, but influential nonetheless.
A different group of influences, however, point to moderation in the growth pace going forward. Primary among these are continued tight credit conditions. Of course, the Fed has poured liquidity into financial markets and institutions, driving down mortgage rates and inducing greater demands for credit in the process. But at the same time, banks and other mortgage lenders, still hurting from past losses, have maintained tight lending standards so that many who want credit cannot get it. According to the Fed, those standards have begun to ease of late, but they remain stringent by historical standards. Indeed, Fed data show continued stagnation in bank lending for any real estate venture.4 The modest relaxation in lending strictures was sufficient to finance the sales surge from the extremely low levels of last year, but it is not yet sufficient to sustain continued rapid advances now that activity levels have risen. No doubt, lending restraints will ease in time and real estate lending will expand concomitantly, but bank behavior suggests that the change will unfold only slowly.
As this bank behavior keeps a lid on this pace of sales growth, building activity will likely grow at a slower pace as well. Indeed, builders seem to be so far ahead of sales that they may need to pause. After all, starts of new homes leaped up almost three times faster than sales during the past year, and though the existing inventory of new houses has returned to historically manageable levels, it seems likely to expand again as this surge in starts reaches completion and comes onto the market. The difference will hardly halt the overall pattern of growth, but it should, at the very least, point to a slowdown in the growth pace of new construction. Certainly, just such a pattern was evident in the mid-1980s, which was the last time that the economy recovered from a burst housing bubble. Then, it took five years from the trough before sales and activity returned to their old highs.5 If there were a literal repeat of that pattern, it would imply the year 2015 before a full recovery—but, of course, this bust was more severe than that last one.