Just as the housing collapse played an outsized role in the recession, a housing turnaround will be especially crucial to a recovery in the broader economy. In recent months, housing activity has shown clear signs of stabilizing. From here, any upturn will follow the usual path: improving sales will lift new construction, followed later by a firming in prices. It will be a drawn-out process, but recent data suggest the cycle is at least starting to move forward.
Through March, the more than three-year plunge in home sales appears to have bottomed out. March sales of existing and new homes were above their January lows by 1.8% and 7.6%, respectively. Economic reports this week will offer April updates on both sectors. Demand has been buoyed by record affordability, reflecting sharp declines in prices and very low fixed mortgage rates for conventional loans. The stabilization in existing home sales also reflects a surge in demand for heavily discounted foreclosure properties, especially in key boom-bust states. Over the past year, sales are up more than 100% in Nevada, more than 75% in California, close to 50% in Arizona, and about 25% in Florida.
Sales of new homes may compete with demand for existing homes in states where foreclosure sales are high, but once new home sales begin to rise, it shouldn't take long for builders to respond with new construction. Because housing starts built for speculative sales, which excludes owner-built and custom-built homes, have been running well below sales of such homes, new home inventories through March have shrunk 43% from their level two years ago. The months supply at the current sales rate is still high, because sales have been weak, but as demand picks up, the 10.7 months supply in March could be cut in half to more normal levels by yearend.
Builders already sense a more encouraging market in coming months. Already, starts of single-family homes stopped falling in February, and they ticked up in March and April. The National Association of Home Builders' Housing Market Index, which surveys builders' assessments of current and prospective sales and buyer traffic through model homes, rose for the second consecutive month in May. The gauge is still historically low, but it is the highest since last September.
Firmer home prices will be the last stage of the housing recovery. Both major price indexes for March are due this week, and the news will not likely be good, especially for the S&P Case-Shiller index. Through February that gauge is down 31% from its 2006 peak, and there is no sign it is anywhere near bottoming out. However, this index is skewed by a high percentage of homes with nonconventional loans, homes that are leading the foreclosure surge and selling at large price discounts. The Federal Housing Finance Agency's price index, which is heavily weighted with homes with conventional mortgages, is down only 8.5% from its peak. Economists believe reality lies somewhere between the two indexes.
Any housing recovery will face an uphill battle. Although consumer confidence has perked up and affordability is high, the ability to purchase a home will continue to be constrained by a weak job market, shrunken household balance sheets, and diminished availability of credit. However, while those factors will limit housing's recovery, they won't prevent one from taking hold.
Here's the weekly economic calendar, from Action Economics:
|Top Reports||Date||Time||For||Median Estimate||Last Period|
|Consumer Confidence Index||Tuesday, May 26||10:00 a.m.||May||42.0||39.2|
|Existing Home Sales (Millions)||Wednesday, May 27||10:00 a.m.||April||4.640||4.570|
|Durable Goods Orders||Thursday, May 28||8:30 a.m.||April||0.0%||-0.8%|
|New Home Sales (Millions)||Thursday, May 28||10:00 a.m.||April||0.365||0.356|
|GDP (Preliminary)||Friday, May 29||8:30 a.m.||Q1||-5.6%||-6.1%|
|GDP Chain Price Index (Preliminary)||Friday, May 29||8:30 a.m.||Q1||2.9%||2.9%|
|Chicago PMI||Friday, May 29||10:00 a.m.||May||42.0||40.1|
|Consumer Sentiment Index (Final)||Friday, May 29||9:55 a.m.||May||68.3||67.9|
|ICSC-UBS Store Sales||Tuesday, May 26||7:45 a.m.||May 17-23|
|Johnson Redbook Weekly Store Sales||Tuesday, May 26||8:55 a.m.||May 17-23|
|S&P Case-Shiller Home Price Index||Tuesday, May 26||9:00 a.m.||March|
|Richmond Fed Survey||Tuesday, May 26||10:00 a.m.||May|
|Dallas Fed Survey||Tuesday, May 26||10:00 a.m.||May|
|Mortgage Applications||Wednesday, May 27||7:00 a.m.||May 17-23|
|FHFA Home Price Index||Wednesday, May 27||10:00 a.m.||March|
|Initial Unemployment Claims||Thursday, May 28||8:30 a.m.||May 17-23|
|Kansas City Fed Survey||Thursday, May 28||11:00 a.m.||May|
Cooper is BusinessWeek's senior editor and senior economist and writes the influential Business Outlook column.