Amid a Slow Recovery, Housing Affordability Stays High
New housing starts came in this week at 1.189 million units at an annual rate in June, while housing permits rose to 1.153 million. Both were increases over the May figures, and are well above the lows following the Great Recession.
However, both also remain well below the peak levels seen at the height of the housing boom, and both remain below the average levels that prevailed over the decades before the housing boom and bust of the 2000s.
Housing, or residential investment as it is known by economists, accounted for about 3.5 percent of real gross domestic product in the first quarter of 2016, up from a low of about 2.5 percent in 2010. It has been a small but positive contributor to economic growth over the past few quarters, adding about 0.5 percentage points to first-quarter GDP growth.
The outlook for housing remains modestly upbeat. According to new data from the National Association of Home Builders, their Housing Market Index, which is based on a monthly survey of NAHB members and designed to take the pulse of the single-family housing market, suggests that market conditions for the sale of new homes are reasonably favorable. The index ticked down to 59 in June from 60 in May, but is consistent with levels seen during prior economic expansions.
Further supporting housing is the overall level of affordability. The combination of home prices, interest rates and income levels suggest housing affordability is well above levels that existed for the 25 years leading up to the housing bubble of the mid-2000s. The Housing Affordability Index from the National Association of Realtors has been fluctuating in the 155-180 range for the past three years. This index measures whether or not a typical family could qualify for a mortgage loan on a typical home. To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.
With interest rates likely to remain low, the labor market continuing to strengthen, and confidence remaining solid, the outlook for housing is modestly upbeat.
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Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals. Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.Robert Hughes
