The results of the 2013 Annual report from the Federal Reserve Bank of Dallas finds that the housing recovery is experiencing what appears to be a sustainable rebound.
"With a durable housing recovery at hand and the broader U.S. economy poised to further improve, we are confident that 2014 will bring new opportunities for the country and the Eleventh District, whose economic performance has led the nation forward from one of its toughest periods," writes Dallas Fed president Richard Fisher.
Access to all four subreports, written by Dallas Fed vice president John Duca, are available here.
Duca outlines three factors that are broadly consistent with the sustainability of the recovery of real house prices.
Reaching these factors, the report states, is a necessary condition to continue a sustainable home-price turnaround. And this condition appears to have been met, considering evidence from several key measures.
1. Prices consistent with inventory
The inventory of unsold homes largely reversed course in 2011; the months’ supply of homes fell sharply. Since early 2012, this gauge has declined below the neutral six months’ supply threshold, and real house prices have risen at an annualized 4–5% since late 2012. The pace of sales relative to the level of houses for sale suggests that the balance of supply and demand will continue supporting further price increases.
2. Supply and demand is coming in line
House price levels can be sustained when the demand for housing (which mainly depends on personal income, real mortgage interest rates and credit standards) is in line with the housing supply.
Inflation-adjusted income has started to rise on a per-capita basis, and real after-tax mortgage interest rates have returned to more normal levels.
3. House prices are sustainable in light of rents and real mortgage interest rates
The alignment of house prices with mortgage interest rates and income is captured in a related measure: the National Association of Home Builders/Wells Fargo Housing Opportunity Index. The index measures the percentage of homes sold in a quarter that are affordable to a median-income family who obtain a conventional, 30-year, fixed-rate amortized mortgage with a 10% down payment and a maximum 28% of household income assigned to mortgage repayment.
During the period preceding the housing boom, 1993 to 1999, the index fluctuated between 60% and 70%. Although mortgage interest rates were low during the mid-2000s, the index fell to 40%, accompanying a sharp rise in house prices, partly the product of greater availability of nonprime mortgages—later proven unsustainable.
During the bust years, the combination of falling house prices and falling interest rates led to a recovery of the Housing Opportunity Index, which ranged between 70% and 78% between 2009 and 2012. Houses became very affordable, assuming a purchaser could get a mortgage and wasn’t put off by the prospect of continuing price declines. Although both mortgage interest rates and house prices rose in the summer of 2013, recent index readings are near those of the preboom mid- to late-1990s, when the level of prices was sustainable.
