There has been much talk about a recovery in the housing market. Sales have been decent, albeit volatile. Prices have inched higher. Inventories are down. Homebuilder confidence has improved. The Fed is certainly trying to boost the housing market with their latest mortgage-backed security purchase program. Affordability is at record levels as the 30-year mortgage rate has fallen to 3.4% (bankrate.com). Refinance activity has surged in response but purchase activity hasn’t yet followed.
While there are undoubtedly positive signs in the housing market, the chart below from David Rosenberg at Gluskin Sheff puts the recent increase in housing starts into perspective. While starts have increased meaningfully over the last two years, they remain very depressed when you look at historical levels.
The demand for housing should slowly improve as employment picks up and the pace of household formation increase. However, despite the recent decline in inventories, the supply side will pick up as well. Potential sellers may be sitting on the sidelines waiting for firmer prices. There are also a significant number of delinquent and foreclosed properties – so-called shadow inventory – in the pipeline.
We don’t expect a sharp turnaround in housing starts or sales, but any improvement will be an incremental positive to growth after acting as a detractor from growth for some time. Stabilization in housing prices will also serve as a boost to consumer confidence. For this reason we recently added the improvement in the housing market as one of our positive tailwinds for the U.S. economy, acknowledging this is a long-term view and will likely be played out over many quarters, not months.