A couple of questions in last week’s on-line chat wondered about where housing is and where it might be — are we back to normal? And what, by the way, is “normal” for housing. Is it the “new normal” of slow sluggish growth that was discussed for the economy a few months ago?
With housing not much better than in the 2007-2009 recession it is easy to say that housing is certainly not “back to normal.”
What is normal? for housing or for the economy? Prices from 1987 to May, 2011 on the 10-City Composite of the S&P/Case-Shiller Home Price Indices rose at about 3.7% per year. That’s before adjusting for inflation while including the boom in the data. While many might argue that normal means annual price increases less than that, prices fell in the last 12 months so we can’t say that price changes are anything close to normal. Besides prices, housing starts are one of the most widely followed statistics about home building. Single family starts averaged an annual rate of 420,000 in the first six months of 2011 compared to 1.1 million annual rate over the last ten years. To find a monthly number even close to the recent pace one needs to go back to October, 1981 when single family starts were 523,000 at annual rates — about 100,000 more than the first half of this year. Starts are certainly not normal.
One of the concerns in the current economy is that housing is not making as much of a contribution to GDP as it should or would in normal times. In the 2011 second quarter, residential investment — GDP-speak for housing — was 2.4% of GDP. That’s half the average of the period since 1995. In fact, the residential investment share of GDP fell continuously through the recession and recovery instead of providing a boost to the economy as the recession ended. Again, nothing normal here.
When could we give a sigh of relief? Maybe if we see the difference between where we are and normal cut in half. Residential investment at 3.6% of GDP, single family housing starts at 750,000 and home prices rising at least a little bit over the last 12 months.