by Ralph Cole, CFA Executive Vice President of Research

Homeward Bound

Thanksgiving is the busiest travel time of the year. Families are crisscrossing the country returning to their childhood homes to celebrate the holiday. And one thing we should all be thankful for is a healthy housing market.

Earlier this week it was reported that the S&P 500/Case-Shiller Home Price index rose 5.5 percent from the prior year. Home prices remain 20 percent below levels reached in 2006 on average, but what is more important than the home price level is the change from one cycle to the next. From 2000 through 2006, home prices doubled at an unsustainable pace and we all paid the price. The current cycle is much more measured and thus, much more durable in our mind.

Home Is What You Make It

Prices are just one part of the overall housing equation. Below you can see housing starts for the past 30 years. Housing starts in the U.S. are just now barely above levels reached at the bottom of the last housing cycle in 1990. The first few years after the housing crash we experienced low rates of construction before it finally started to accelerate in late 2011.

The Incredible Journey

A continued rise in housing starts is needed to offset continued strong demand for new homes. If supply were too low, we would expect home prices to accelerate at a faster pace, making them less affordable. To this point, the market seems to be in balance.

Takeaways for the week

The housing market is on much sounder footing this time around
Have a safe and healthy Thanksgiving Holiday

Disclosures

by Brad Houle, CFA Executive Vice President

In the month of March, sales of previously owned homes increased to 6.1 percent. Sales of 5.19 million homes is the highest level we’ve seen since 2013. At the height of the housing bubble prior to the great recession in 2008, existing home sales were as high as 7 million a month in the summer of 2005.

Following the 2008 crisis, existing home sales dropped as low as 3.5 million in June of 2010. While we will probably not see a return to 7 million homes sale in a month, the housing market is most certainly recovering. New home sales have followed a similar pattern, peaking prior to the crisis at 1.25 million in the summer of 2005 and now are averaging around 500,000 new homes per month.

Home sales are driven by new household formation as well as job growth. New household formation is defined as individuals who are between the ages of 25 and 35 moving out of their parents’ basements to live on their own. While many people in the millennial generation prefer to rent, some are becoming first-time home buyers which is driving entry-level housing sales. Payroll growth has been robust with the unemployment rate dropping from 10 percent post-financial crisis to only 5.5 percent. There is a strong correlation with home sales and payroll growth as people become more secure in their employment … home sales follow.

Housing supply is low relative to historical rates with less than 5 months of supply. During the downturn, inventory ballooned to more than 12 months of supply. A lack of supply is driving prices higher in many markets also fueled by low interest rates.

Anecdotally there are tales of home buyer bidding wars in tight markets and other frenzied 2006 housing bubble behavior. According to the S&P/Case Shiller Home Price Index, home prices in the U.S. have only recovered 54 percent of the value lost since 2006. The most important difference between housing activity now and prior to the downturn is that lending requirements are much more stringent than in the past. Gone are the days of stated income loans, also known as liar loans, and no-money-down subprime lending. Lending requirements now require actual income and asset verification as well as a 20 percent down payment.

Our Takeaway for the Week

o Despite positive housing news, we do not think this industry is heading into bubble territory

Disclosures

Who Says You Can’t Go Home?

Moving Out