US Housing Market at the End of 2011

New home construction, builder sentiment, and existing home sales all improved in the second half of 2011. Crucially, the job market picked up speed, and the unemployment rate edged down. Still, these developments were not enough to keep the single-family segment from having its worst year on record. Numerous records fell. Single-family starts (data start in 1959) and single-family permits (data start in 1959) set record lows in 2011. Single-family starts in all four regions (data start in 1964) and single-family permits in the West and Northeast (data start in 1960) also set record lows. Overall, builders began work on 607,000 units in 2011, the third-lowest total on record. The official data on housing starts date back to 1959, but a discontinued series available from Federal Reserve Economic Data confirms that the 2011 totals were the third lowest since 1946, after 2010 (587,000 units) and 2009 (554,000 units). Builders completed fewer homes than ever before in 2011—584,000 (data start in 1968)—of these, 445,000 were single-family homes (a record low) and 139,000 were multifamily homes (also a record low). Finally, total and single-family completions also set record lows in all four regions.

The record-low construction numbers were a response to record-low demand for new homes, as new home sales set all-time lows nationally and in all four regions (data start in1963). The number of new homes for sale also ended the year at record lows nationally (156,000) and in all four regions (this is good news, because inventory will have to be restocked once demand picks up). In what on the surface appeared to be good news, sales of existing homes increased 1.7%. But whether the existing home sales market was better in 2011 than 2010 is hard to say since distressed sales, which account for about one-third of sales, lifted sales in both years.

The multifamily market sprang to life in 2011. Builders started 204,000 housing units (seasonally adjusted, annual rate) in the fourth quarter, double that of a year earlier, as the shift away from homeownership and towards renting accelerated. About 70% of the multifamily units started were in the South and West, a result of a population shifting towards warmer climates. Texas, alone, accounted for 16% of the total.

A slowdown in population growth was an additional drag on housing. According to the Census Bureau, the US resident population increased by 2.8 million over the 15-month period ended on July 1, 2011, or 0.92%, the slowest pace since the 1940s. Five states—Texas, California, Florida, Georgia, and North Carolina—accounted for one-half of the population gains. Texas was both the fastest-growing state (at 2.7%) and added the most people (529,000) over the 15-month period. Three states—Maine, Rhode Island, and Michigan—lost people during this interval. The population decline resulted from slowdowns in the birth rate and in-immigration.

The slowdown in immigration may be long-lasting because of developments in Mexico and other Latin American countries. According to the Pew Research Center, net migration from Mexico is about zero today, a slowdown related to the weak US job market, but also to improvements in Mexico’s living standards. Mexico’s fertility rate (a good indicator of development) has dropped from more than 6.0 (births per woman) in the early 1970s to 2.3 in 2010 (1.9 is the cutoff rate that will stabilize population growth), implying that immigration from Mexico may not accelerate strongly as the US job market improves. Indeed, the Census Bureau, in projections released in mid-2011, cut its net international migration projections for 2012–22 from 1.42 million per year to 1.22 million. Given a back-of-the-envelope calculation of 2.6 persons per household, this translates into roughly 75,000 fewer housing starts a year.

Home prices fell again in 2011, but their direction at year-end was unclear. All of the best-known yardsticks that measure house prices fell by 3.0–4.5% in 2011, more than in 2010. But near the end of last year, the Federal Housing Finance Agency (FHFA) house price purchase indexes (seasonally adjusted), which track the prices of homes with mortgages that Fannie Mae and Freddie Mac guarantee or securitize, was inching up nationally and in eight of the nine Census divisions, while other measures were still heading down. Why was this? Most likely because the FHFA indexes include a smaller proportion of distressed sales. About 10% of the homes under Fannie Mae’s and Freddie Mac’s jurisdiction are currently underwater, compared with about 22% for all homes with mortgages. The rising FHFA indexes suggest that the prices of homes that are not under the threat of foreclosure (i.e., the majority of homes) are stabilizing.

The market finally put a dent in inventory. At the end of 2011, the homeowner vacancy rate, which measures the proportion of homes that are vacant and for sale, stood at 2.3%, down from 2.7% four quarters earlier, and the lowest quarterly reading since early 2006. This vacancy rate is consistent with a glut of about a half a million houses. At the current pace, eliminating the overhang should take less than two years, but will probably take longer, because it is concentrated in a few high-unemployment states.

The homeownership rate continued to drift down, falling to 66.0 at the end of 2011, down from 66.5 four quarters earlier and from its 69.2 peak reached in the fourth quarter of 2004. But how much lower will the homeownership rate go? Given that many of the over 6-million homeowners behind on their mortgages will eventually become renters, and given how much harder it is to qualify for a mortgage than it once was, a homeownership rate of 64 (about its average value during 1965–90) is plausible.

And of course, mortgage rates also set record lows in 2011, but this did not seem to matter much because credit was tight all year. Why was it so hard to get a mortgage? According to a Federal Reserve white paper, it was partly because the FHFA—Fannie Mae’s and Freddie Mac’s (the Enterprises) regulator and conservator—was trying to protect the taxpayer from further losses. The FHFA, which has a congressional mandate to “preserve and conserve” the Enterprise’s assets, has made sure that the Enterprises tighten their requirements for buying or guaranteeing loans. Lenders, in turn, have tightened their standards. Tighter credit has taken many forms, including higher down payments, stricter appraisal standards, higher fees, more documentation, and a smaller line of products. In surveys, lenders say that they are worried that the Enterprises will make them repurchase loans that sour in the future, and that foreclosing on a home is messy and expensive. The white paper suggests that lenders have set the bar for getting a loan much higher that the Enterprises require.

This is a problem the Congress will have to sort through. The dilemma is that unless the Enterprises loosen up, the housing market and the economy will be slower to get back on track. But if they loosen up too much, the taxpayer will have to foot the bill. The white paper suggests that it might be in the taxpayer’s interest to sustain greater short-term losses if it results “in a quicker and more vigorous economic recovery.”

Favorable weather boosted the housing numbers at the end of 2011. November was unusually warm, particularly in the Northeast; December was unusually warm in the Northeast and Midwest, and extremely dry in the West. January was the fourth-warmest January on record, and the 28th driest (historical data go back to 1895), so housing should start the year on solid footing. Favorable weather mainly shifts activity across time, so expect some payback in March or April (but maybe not in February, since January’s better-than-normal weather has carried into February). For 2012, we are expecting better housing numbers than in 2011, and a better second half than first. But a return to normal is still a couple of years away.

by Patrick Newport