Housing’s Long March to Normal

Housing’s Long March to Normal

Another month, another 200,000-plus jobs for the U.S. economy, according to the latest report from the U.S. Department of Labor.

“The economy and the housing market continue their gradual march back to normal,” says David Crowe, chief economist for the National Association of Home Builders. How far do we have left to go?

The nation is now running at 90 percent of normal economic and housing activity, according to the latest NAHB/First American Leading Markets Index (LMI) report, released November 6. Nationwide, the index score moved up slightly to 0.90 in the third quarter from 0.89 in the second quarter. 

Healthy housing markets overall will have a big impact on the apartment business. So far, multifamily properties have benefited from a lack of competition from single-family homes. Eventually, that competition will return, and homebuilders once again build homes to lure renters out of their apartments.

“We are returning to health,” says Michael Neal, NAHB senior economist. “Whatever the short-term transitions, don’t fear it.” Apartment managers will also benefit as the housing market gets back to normal, says Neal. Revived household formation will help fill all the new apartments developers are now building as young people rent apartments of their own and seniors are able to sell once-overleveraged homes and potentially move to apartments.

Multifamily and commercial investors and developers care most about employment, which is at 0.95 on the NAHB index. That’s within shooting distance of normal. The index level means that in the last 12 months average employment was at 95 percent of the peak employment levels of 2007.

Permits to build new homes is the component of the index lagging the most – at 0.44 nationwide in the third quarter, up from 0.43 in the second quarter. The score of 0.44 means the total permits issues in the past three months were at 44 percent of the last normal period, which was 2000-2003. Home prices also rose to 1.3 in the third quarter, up from 1.27, which means house prices are 30 percent higher than the average in 2000-2003.

Markets in 59 of the approximately 350 metro areas nationwide returned to or exceeded their last normal levels of economic and housing activity in the third quarter of 2014, according to the National Association of Home Builders/First American Leading Markets Index (LMI), released today. That’s seven more metro areas back to normal or better compared to 12 months ago. Two-thirds (66 percent) of the metro areas tracked by the index improved.

The metro areas fueled by the energy business performed best on the index. Fifteen of the metro areas rated back to normal or better are in Texas, eight are in Louisiana and three are in North Dakota. Top metros include fossil fuel boom towns like Midland, Texas, which scored 2.31; Odessa, Texas, 2.14; Grand Forks, N.D., 1.58, and Bismark, N.D., 1.53. Smaller metro areas with universities or military bases have also done well.

“Recovery is increasingly about economic fundamentals and less about the boom and bust cycle,” says Neal. Markets hurt worst by housing crisis like Las Vegas, South Florida and California are among the areas with the fastest improvement in the third quarter, according to the index. “I was encouraged that areas that were hit hard like Reno, Nev., are starting to recover at a faster than average,” says Neal.

The weakest housing markets cluster in industrial regions of the Eastern Midwest. As Detroit emerges from bankruptcy, the index rates Detroit’s employment at an almost healthy 0.97, even though home permits and home prices lag for automotive capital.

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