Market Insider: Regional Variations in Recovery


housing_market_recovery_graphThe national housing data have been quite impressive this year. Existing-home sales were up 9.4 percent last year and are on track to match with similar increases this year. New-home sales are showing even better percentage gains, though off very low levels after having collapsed by more than 70 percent during the Great Recession. Home prices have also been rising at a faster pace than almost anyone expected, with national median prices projected to rise 11 percent this year.

Even though the Great Recession has been in the rear view mirror for some time, a number of observers ask whether the recovery is sustainable, and whether currently expanding housing demands are likely to overheat. Job creation has been relatively weak, but government policies now seem to be strongly focused on getting people back to work. At this point, the economy and job creation are forecasted to be on an upswing – at least for the next year and probably significantly beyond. In addition, there is major pent-up demand in the housing markets, providing a base for expanding sales. Overall, the demand nationally for new construction is in the neighborhood of 1.6 million new homes each year to accommodate household formation, second home demand, and demolitions. New construction has been running well below that figure for a number of years and will need at least another year to ramp-up, so home inventories are likely to remain constrained for the immediate future. Put differently, there is substantial support for housing demand and prices. In view of constrained lending practices by financial institutions, however, continuation of the rapid price appreciation we have recently been experiencing on a year-over-year basis appears unlikely. The rate of price appreciation appears likely to slow somewhat, being both income and appraisal constrained.

As we know, all real estate is local. Houses cannot simply be picked up from one location and moved to another spot to take advantage of price arbitrage. In Texas and North Dakota, home prices have already soared above past peaks. One reason is that these states did not really have a big bubble to begin with. More importantly, though, these states are creating jobs—and more jobs. While the country as a whole still has not fully recovered the 8 million job losses that occurred during the Great Recession of 2008-09 (to date, 6 million net new jobs have been created from the trough), North Dakota is setting new peaks with each passing month. North Dakota now has 75,000 more jobs compared to the good economic times before the Great Recession, while Texas has 600,000 more jobs. Here is the easy math: more jobs mean more home sales and stable/rising home prices.

The good news is that nearly all states are now experiencing job growth. Just to provide some flavor, in the past 12 months to June, California added 236,000 net new jobs, Florida 119,000, Georgia 85,000, Illinois 56,000, Massachusetts 53,000, New York 94,000, North Carolina 66,000, and Tennessee 42,000. Even Michigan (though not in Detroit) ramped up hiring by 59,000 people.

There are, however, specific housing-related variations amongst states. In the states that have quickly worked down distressed properties (those homes in serious delinquency or in the foreclosure process), home prices are rising at a good solid pace. Further, knowing that there are few distressed properties in the pipeline, homebuyers and investors have the added confidence of knowing there will not be a flood of bad properties hitting the market – neither sooner nor later. California and Arizona are prime examples. The serious delinquency rate in California had been 12.5 percent at the worst of times, but now has fallen to 4.5 percent. Arizona’s rate went from 12.5 percent to 3.7 percent.

By contrast, in states where the foreclosure process is stretched out because of the need to obtain final court approval (known as “judicial states”), with many cases taking more than 24 months, the lingering overhang of distressed inventory is preventing home prices from solidly moving higher. If prices do rise, buyers are still left wondering if the gain is only a dead cat bounce since a plentiful supply of bad properties will come on to the market sooner or later. Therefore, home price gains have been much more modest in Connecticut, Illinois, New Jersey, and New York, the states that require judicial process. New York, for example, is still experiencing a rise in serious delinquent mortgages with 9.7 percent in that category. New Jersey is at 13.2 percent and still rising.

Housing starts, the key to helping relieve inventory shortage in non-judicial foreclosure states, vary greatly as well. In areas where new home inventory does not meaningfully come around, home prices will rise faster. For example, in the case of existing home sales when inventories are at five months of supply, prices tend to rise. When inventories are nearer eight months of supply, prices tend to be under pressure. In between – depending on market conditions and the economy – is the point at which prices are stable or rising gradually.

Housing starts in general should vary with the strength of the underlying economy – strong in North Dakota and Texas, weaker in much of New England, New Jersey, and Pennsylvania, and probably weaker in some of the central and southern parts of the country—Illinois, Wisconsin, Iowa, and North Carolina among others. However, regardless of the region or state, all new construction is local—states do not uniformly economically prosper or decline. And the major driver—again—is job availability.

Normally, one would expect to see housing starts taking off. Construction has typically provided a strong economic driver coming out of a recession, but such has not been the case this time. During the Great Recession a number of smaller builders went bankrupt, and banks have significantly ratcheted up their credit requirements relative to where they were a few years ago. Large builders with access to a variety of financial sources, including Wall Street, can still obtain money for financing construction. However, the small builder—possibly 5, 12, or 20 houses a year—if still in business, has at best, a much more restricted access to the credit markets. Typically, small builders have accounted for approximately half of the new homes coming onto the market—and a major part of that supply is now gone.

What does the current market situation mean for housing market participants? In general, consumers can expect to find limited inventories of available homes, a tendency for rising prices, and continued competition for the available supply. Having a REALTOR® to provide guidance through the home-buying process is important. Although additional supply will be coming onto the market as builders continue to ramp up, additional buyers—particularly from the millennial generation who have put off home purchases in some cases—are also likely to appear as they form families and find better jobs. There have been significant price rises up to this point, but prices are likely to increase at a lower rate in the future, simply because previous rises are not sustainable from an income point of view. In addition, financial institutions are in a strongly risk averse position and are likely to make sure that appraisals continue to focus on current market realities.

For builders, this can be the “best of times” if credit is available and they tailor the product to meet changing consumer demands. For example, there appears to be a movement away from the four-bedroom suburban home to an urban oriented townhouse offering access to various amenities.

For REALTORS®, the market challenges are substantial but potentially rewarding: There is a strong housing demand, but bringing a transaction to conclusion will involve bringing financial, product selection and market response capabilities together in a credible package.

There is a statement that a rising tide raises all boats. In the case of the housing market, that statement will continue to be true to a significant degree. However, the “housing boat” will rise faster in those areas where jobs are added in substantial numbers, and slower in areas that are job constrained.

Lawrence Yun is the chief economist for the NATIONAL ASSOCIATION of REALTORS®. For more information, please visit

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