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» VISIT US ONLINE @ DSNEWS.COM COVER STORY POINT-COUNTERPOINT According to Daniel Hartley and Kyle Fee According to Jed Kolko Trulia's Housing Barometer shows the recovery is now two-thirds of the way back to normal. Existing-home sales have returned to their long-term normal level, while construction lags significantly. The recovery is not a straight line; it moves through different phases. Since February 2012, Trulia's Housing Barometer has charted how quickly the housing market is moving back to "normal" by summarizing three key housing market indicators: construction starts from the U.S. Census Bureau, existing-home sales as reported by the National Association of Realtors, and POINT— COUNTERPOINT crisis. In the past few years the foreclosure inventory has begun to fall substantially and the proportion of mortgages in default (measured as three or more missed payments) has dropped sharply. The fraction of mortgages entering the foreclosure process has also been declining. That said, there are still many homes working their way through the foreclosure process and, as mentioned above, this is likely to act as a continuing constraint on building activity. Another good sign is that prices are increasing at about the same rate whether one looks at repeat sale indexes that include or exclude distressed properties. While home prices have started to rise in many areas over the last year, we need to remember where we came from. Prices fell into such a deep hole, that in spite of recent growth, they have not yet caught up to prerecession levels, and growth has varied quite a bit depending on the region. Still, taking the recent data together, the housing market seems to be operating in a more normal, pre-boom-and-bust state. Though not brisk enough to make up for past losses in some places, it does seem to be on firm footing. The views expressed are those of the authors, and not necessarily the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System. MARKET PULSE Four years into the economic recovery, housing markets have finally started to improve. While many indicators of activity indicate recent growth, comparing over time and across the United States suggests that many regional housing markets are looking better now only in comparison to where they were during the recession. The recovery in housing markets does appear to be gaining steam, but it remains a work in progress in many places. Over the course of the past year, housing has started to pick up. Residential investment increased by almost 21 percent—the biggest year-over-year increase since 2004. Moreover, home prices have firmed up across the country, with year-over-year gains averaging 12.5 percent in the 20 housing markets that are tracked by the Case-Shiller index. Despite recent increases, however, home prices in many of the 20 CaseShiller markets are no higher in real terms than they were in 2000. One sign that housing markets may be back to a somewhat more stable equilibrium is that the number of units of housing on the market and the pace of sales are back to more normal rates. Prior to the recession, there was roughly five months of inventory available, given the sales rate at that time. In the recession, the months of inventory doubled as the rate of sales declined sharply. Today, the market is back to pre-recession inventory levels. This is a sign that some of the things dragging down the housing recovery— excess inventory and lower rates of household formation—may be abating. Another indication that housing markets are stabilizing is that vacancy rates are returning to trend. In the aftermath of the Great Recession, we have seen rental and owner-occupied vacancy rates fall back down to levels closer to those typically seen in the 1990s and early 2000s. These measures of inventories and housing vacancy rates are linked closely to the foreclosure the mortgage delinquency-plus-foreclosure rate using Lender Processing Services' First Look report released ahead of its monthly Mortgage Monitor. For each indicator, we compare this month's data to (1) how bad the numbers got at their worst and (2) their pre-bubble "normal" levels. In August 2013, all three measures showed improvements: construction starts and existinghome sales rose slightly, while the delinquency + foreclosure rate moved strongly downward. Construction starts increased a bit, but remained far from normal. Starts in August were at a seasonally adjusted annualized rate of 891,000—up 1 percent from July and up 19 percent year-over-year. Construction starts are 40 percent of the way back to normal—the slowest recovering measure of our Housing Barometer. Existing-home sales, on the other hand, have returned to normal. Sales rose in August to a seasonally adjusted annualized rate of 5.48 million—that's up 13 percent year-over-year, and when you exclude foreclosures and short sales, the increase is even greater, up 29 percent year-overyear. Overall, existing-home sales are 99 percent back to normal, even though foreclosures and short sales still make up roughly one-eighth of all existing-home sales. The delinquency + foreclosure rate continued its downward march in August. The share of mortgages in delinquency or foreclosure dropped to 8.66 percent, the lowest level in more than five years. The combined delinquency + foreclosure rate is 60 percent back to normal. Averaging these three percentages together, the housing market overall is now 67 percent back to normal, compared with just 42 percent one year ago. As the recovery matures, some types of housing activity, like sales and price levels, have returned to near-normal, while others, like construction and household formation, remain far from normal. The housing recovery doesn't follow a straight line; instead, it moves through phases, with some measures of housing activity returning to normal long before others do. When we first launched the Housing Barometer, we titled our first post about it: "Are we there yet?" and the answer was clearly "no." Now, "Are we there yet?" is no longer a yes-or-no question; the answer is yes and no, depending on which aspect of the housing recovery you look at—home sales, construction, or nonperforming loans. PROFILE IN LEADERSHIP A nalysts remain confident the housing recovery is well underway despite the marketdiminishing effect of slowing price growth and climbing interest rates in recent months. This recovery will manifest itself in fits and starts, they say, there's no reason to become alarmed over a negative indicator here and there. With so many markers and gauges to account for, how can we determine just how far we've come in this post-recession housing recovery? DS News asked Fed economists Daniel Hartley and Kyle Fee and Trulia's chief economist Jed Kolko to share their assessments of our progress thus far. 65

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