NCPA - National Center for Policy Analysis

Housing Recovery Still Has Room to Run

May 22, 2013

The roof is not caving in on the housing sector. While the 16.5 percent plunge in April housing starts last week was stunningly large, the details of the data indicated the housing recovery will continue for the rest of this year, says the Wall Street Journal.

  • First, the drop in April starts was mainly in multiunit projects, which tend to be volatile. The 37.8 percent drop in apartment starts last month followed a 22.5 percent gain in March and a 12.5 percent advance in February.
  • Second, the dearth of building in past years means a tight supply in new single-family homes. According to Commerce Department data, only 153,000 homes were on the market in March, an inventory that would last only 4.4 months under current sales activity. (Housing starts data cover not only new homes put up for sale but also projects contracted by owners or built by the owners themselves.)
  • Finally, builders are no longer price-takers, as was the case during the Great Recession when cash-strapped developers had to slash prices to move new homes that were competing with cheaper, almost-new foreclosed houses.

Demand for housing has recovered, thanks to better job prospects and ultra-cheap mortgage rates. While it is not as frothy as during the housing boom, the market is healthy enough to boost home prices, enabling more builders to make a profit and finance new projects.

The most closely watched gauges of home prices show the increases were strengthening back in February. Economists at Credit Suisse point to a proxy for home values within the producer price index (PPI) report that indicates the price recovery continued through April.

  • According to Credit Suisse's director of U.S. economics, Jonathan Basile, the PPI covering fees and commissions received by real estate agents and brokers was up 9.1 percent from year-ago levels, the largest yearly increase since 2005.
  • The index tracks the trend in the more visible Case-Shiller home price index and "suggests positive news on house prices should continue," says Mr. Basile.

Source: Kathleen Madigan, "Housing Recovery Still Has Room to Run," Wall Street Journal, May 20, 2013.


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