Home buyers, home builders, and the general public have renewed their confidence in the economy and in the housing market. This doesn’t necessarily mean everything is back to normal, but because consumers are more than two-thirds of the economy, a confident consumer is more likely to buy a home.
The evidence of an improved outlook is widespread. Two organizations survey consumers on a monthly basis, and their indexes are at levels last seen in early 2008 before the financial collapse and the beginning of the worst recession in more than 70 years. In addition, these national surveys also ask questions about attitudes toward home buying. The University of Michigan survey asks if it is a good time to buy a home, and more than 80 percent of those surveyed responded “yes,” which is the highest percentage since 2003. The Conference Board asks if the respondent intends to buy a home in the next six months, and affirmative responses are at the highest in the history of the index.
Builder Confidence Up
Builders also are demonstrating renewed confidence. The NAHB/Wells Fargo Housing Market Index (HMI) is a monthly measure of builders’ confidence and the overall index is at its highest level since 2005. The survey driving the index asks three questions about current home sales, expectations for future sales, and customer traffic. The expectation component also is at its highest level since 2005, and the current sales index is at the highest since January 2006.
Builders’ confidence has been rising faster than builders’ production. The HMI increased 75 percent in a year while single-family housing permits rose 25 percent. A similar advanced confidence move occurred after the 1990 recession when the HMI rose 120 percent as permits increased 52 percent. Eventually, permits caught up with builders’ attitudes in the 1991–92 recovery, and I expect the same in this recovery.
Confidence has returned because the things that worried consumers and builders are improving. Households have reduced their debt levels to what they were in 2003 at a bit over one year’s income. At the peak, households owed 130 percent of their annual income and reducing that meant less spending and more repaying and saving. The savings rate has settled back to near historic levels, which means more income spent.
Meanwhile, households feel wealthier because house prices have moved forward. House prices have seen positive moves for more than a year in part because of pent-up demand and investors competing for limited inventories. House prices are back to levels seen in 2008 as they were falling and in 2004 as they were rising. Higher, consistently growing house prices offer consumers the comfort that they will not see a decline in their equity if they buy and provides more equity if they sell.
Job additions have not been as stellar as home values, but the number of people employed has increased steadily and the number of people looking for a job has declined. From the peak, the U.S. lost 8.7 million jobs and has since gained back 6.7 million, or more than three-quarters of the loss. Of course, in that time, the population of employable people increased so unemployment remains at least 2 percentage points above a sustainable level, and some workers are so discouraged that they dropped out of the labor force and do not count as unemployed.
Those working and with good credit face some of the best housing affordability conditions in history. Since 2009, the NAHB/Wells Fargo Housing Opportunity Index has been above 70; that is, a family earning the median income could afford more than 70 percent of all homes sold in the previous quarter. The most recent quarter did dip to 69.3 as home prices and interest rates rose.
All signals point to positive movements in the underlying causes of improved confidence and hence in continued growth in new-home construction and sales.