Posted tagged ‘Housing’

Longing for a Recovery in Housing

January 30, 2013

On only a few issues can I say that I would be happy to be wrong.  My views on likely home price appreciation and New Hampshire’s housing market  is one of them.     Housing is important to the state’s economic recovery and longer-term prospects for economic growth.  By way of shameless self-promotion, I will be on NH Public Radio’s “The Exchange” discussing some of my views on the topic.  I’m not a real estate economist so it will be interesting to hear how my views differ from someone who will also be a guest and who is a very good real estate economist,  (Russ Thibeault from Applied Economic Research).

The problem I have with most discussions of the  housing market is that housing is by far the economic metric that individuals have the most emotional, psychological and often direct financial attachment to.  Discussions of the housing market are the  most prone to hope, optimism, and wishful thinking, and the least amenable (and welcome) to dispassionate analysis.   If you want something to be true  it is as easy to find evidence to support your view as it is to dismiss evidence that contradicts it.  Every day we hear about the housing comeback nationally so we want to believe it is happening in NH, and we will look for any sign that it is.   I don’t see much evidence that the housing market is recovering as fast in NH as it is nationally and I don’t see factors in the near future that will contribute to it being so.   Long term, job and population growth are the best determinants of home price appreciation in a region and neither bodes well for a quick housing comeback in NH.  The chart below shows the relationship between year-over-year home price appreciation in each state and job growth during the same time period.  Each marker represents one state’s value on job growth (the horizontal or “x” axis) and its rate of home price appreciation over the same time period (the vertical or “y” axis).  Some states with large price declines are seeing out-sized rebounds but job and population growth largely determine price appreciation trends over the long-term (during bubble times that relationship breaks down but eventually it returns to trend),  NH is the red marker and reflects a state with both low job growth and appreciation rates over the past year.

job growth and home price appreciation

I know home sales have increased significantly in NH over the past year but I wonder how large a role  investor purchases for conversion to rental housing is playing in that trend.  For a number of reasons, that I will discuss in future posts, I think economic, demographic, financial, socioeconomic and social trends are likely to favor the performance of rental housing relative to homeownership in NH for several years.  Nationally and in almost all states, the homeownership rate fell during the housing market crash.  NH has a high homeownership rate and it barely dropped during the crash.  Many states are seeing homeownership rates begin to rebound and will see demand and price appreciation benefits from that.  Meanwhile, NH’s rate remains at historically high levels and given the demographic and other trends I don’t have time to discuss in this post, I think the rate will move lower and  closer to the state’s long-term rates.  That won’t help price appreciation.

Homeownership Rates

Gosh that sounds apocalyptic, its not, it just means that we shouldn’t soon expect the big price rebounds seen in many states.  Except I know we will expect exactly that, because residential real estate is about psychology and  about comparables and comparisons,  what has happened in the past.  Any industry strongly influenced by those factors is going to regularly disappoint.

This Crash Was Different

December 13, 2012

This is my second housing market crash since I’ve been in NH and old enough to know anything about them.  The first was the great crash of the late 1980s and early 1990s that took with it the five largest banks in NH and many of the largest banks in New England.  But that crash was fundamentally different and was largely the result of tremendous overbuilding of housing in the state and the region during the mid and late 1980s (see graph below).  Even the recent crash was, in large part, the result of over-building in many of the hardest hit states like Nevada, Florida, and Arizona.  Where overbuilding occurs, downturns are a more dramatic combination of excess supply and and a retreat from irrational expectations of price appreciation.  Again, because NH didn’t overbuild this time, our price declines weren’t as dramatic as many areas of the country and our rebound likely won’t be as dramatic either.  If values have fallen 50 percent as they did in some states, you can get pretty large jumps in appreciation quickly as things stabilize – even though a 10% price appreciation still means values are down 40%.

NH Housing Permits

In NH we don’t have years of excess housing supply to work off before prices can begin to recover.  This time around recovery in prices and new construction will be about the fundamentals that drive the demand for housing, population and job growth, new household formations, and the need to replace old units – I’ve noted that  before (and here).  I wish people would look to job growth in NH instead of what is happening to home prices in other states if they want a clue as to where NH prices are going.  One of the great unknowns is whether the recent troubles in the housing markets nationally and in NH have fundamentally altered perceptions of the value and desirability of homeownership.  I don’t have an answer to that but one indicator could be the percentage of new construction that is for single units versus the percentage for multi-unit structures.  The chart below does suggest that the percentage of building permits for single units in NH did trend lower as the market began to decline, and is likely an indicator of developer’s responding to a lower level of demand for single family housing compared to multi-unit.  Whether this is just temporary or a longer-term adjustment in the attractiveness of single family housing remains to be seen.

NH Single Unot Housing Permits

The Home Price Rebound That Wasn’t

November 29, 2012

The Federal Housing Finance Agency released its latest home price appreciation index on Tuesday and while the data support the belief that housing is bouncing back across the country, and is now becoming a positive influence on economic activity rather than a drag,  the news is not good for New Hampshire.   The FHFA’ s repeat sales home price index shows that NH is one of only a few states that had price depreciation between the third quarter of 2011 and the third quarter of 2012 and only two states (Maine and Rhodes Island) had lower appreciation rates than did New Hampshire.

Repeat sales indices are the only accurate way to measure changes in home prices.  Simply examining median sales prices doesn’t account for the fact that the characteristics of the houses sold may be different (location, size, type, etc.) unless the repeat sales method is used.  I am by nature an optimist.   I am rooting for the housing market because its rebound is important for the prospects of the NH economy and its not so bad for my balance sheet either.   I am also not looking for yet another reason for realtors to take exception to some of my analyses.   I am, however,  a believer in the wisdom of markets (most of the time) but a lot of what happens in markets is driven by pure stupidity – or, rather, inattention, misinformation about fundamentals, and an exaggerated focus on currently circulating stories (the housing market is back, Mitt Romney has got the momentum in the swing states).  At least one of those stories is true , the housing market is coming back as a whole in the nation, just not everywhere.

As I have noted in prior posts, no amount of exhortation and cheer leading about housing can overcome the fact that values are determined by fundamental underlying demand for housing which includes population and job growth, the formation of new households, and the need to replace older housing units.   Both NH’s job and population growth have been weak relative to a majority of states over the past couple of years.  Regressing  job and population growth over the past year in each state on the FHFA’s home price index-based change in home prices in each state shows a highly significant relationship (R=.603) accounting for about 40 percent of the variation in home price appreciation across states.  There are variations in markets within each state, and this analysis is an oversimplification, but nevertheless it is important to remember that home price appreciation cannot, for long at least, outpace the fundamental determinants of the demand for housing – job, population and  household formation growth, and the need to replace obsolete structures.

What’s Behind NH’s Recent Net Out-Migration?

November 1, 2012

I’ve written often about how important the ability to attract skilled, well-educated individuals is to NH’s past and future economic success.  Appropriately, there is much concern over NH’s recent population losses resulting  from movements of residents into and out-of the state and what it says about NH’s relative attractiveness.  Not surprisingly, that concern  results in many simplistic, inaccurate, and analytical flawed explanations for the patterns of migration to and from NH.  I don’t have a book, video, seminar, or anything else to sell that depends of any particular explanation for NH’s migration patterns so I will let the data , as it becomes clearer, shape and evolve my theories on the phenomenon.

Here is the basic scenario:  NH has traditionally been a magnet for residents moving from another state (most prominently from  another Northeastern state – especially MA). During the past decade NH has attracted less net in-migration from other states, especially during the second half of the decade, culminating in net out-migration at the end of the decade.  The resulting concern by many (including me) is that NH may be losing its fundamental attractiveness relative to other states.  Because NH has relied on in-migration to fuel growth in “human capital” and the economy, this would imply very bad things about the future of our state.  I worry a lot about NH’s attractiveness  but my answer to the question of whether the state has lost its attractiveness is: “no…….not yet“.   Lets look at migration to and from the state during the recession (chart below). During the recession the patterns of the past several decades were largely the same – albeit with different magnitudes.  NH gained and lost a  lot of residents from other Northeastern states, and smaller numbers from other states in the South and West.

The difference in recent years has been that the positive net flows to  NH have been smaller for states that traditionally send NH a lot of residents (the Northeast), while the states with whom NH traditionally has net negative outflows have been larger (largely states in the south and west).   But is this a sign that NH is now less attractive?  I don’t think so (yet) and here is why. Since the housing and financial crisis and subsequent recession, the U.S. Census Bureau reports that state-to-state movement in the U.S. (on a % basis) has been about as low as it ever has been.  One reason for that,  many economists believe, is the fact that there were fewer places to move to that had stronger economic growth that often drives migration.  But another important factor has been the phenomenon of “housing lock.”

Because of the housing market bust and subsequent housing equity, credit and financial issues, both the selling and buying of homes were disrupted or impossible for large numbers of homeowners in NH and across the country.  That has especially profound impacts on net migration to NH.  I can’t explain in detail here, but migration patterns in NH indicate that the state has been especially attractive to and a magnate  for  30-44 yr. old, two wage-earner married couple families with children.  To move to NH they typically have to sell a house in their  native state and buy one in NH.  Each of those was a lot more difficult at the end of the last decade.  I believe this  reduced our core demographic of  potential  in-migrants.  At the same time, the housing market crash had less of an effect on the ability of the young, and non-homeowners to move from state-to-state.  This is the demographic group that traditionally has shown net out-migration from NH.  So the groups most likely to choose NH were most constrained from doing so during the last half of the 2000s, while the groups most likely to leave NH were not constrained from doing so by “housing lock” or other housing market issues.  The result – much lower rates of net in-migration to the state.  This explanation doesn’t account for all of the recent decline in net migration to NH, but it surely has played a significant role in the trend.

Spotting Bubbles After They Burst

October 25, 2012

I’ve lived through two housing bubbles since I was old enough to know and care about them.  During the first one I was writing quite unpopular reports for developers and lenders (I’m still not very popular with realtors) that  indicated, to me at least, that the “effective demand” for housing in many areas just would not support a viable project (based on the fundamental underlying determinants of the demand for housing – population, employment, and income growth as well as new household formations).  I did not understand then nor do I do now, how an industry (home building) can survive when so many decisions it makes are made with a view toward the immediate past (what sold last week or month and at what price).  Of course everybody, including me, recognizes a bubble after it has burst.  But there really is no substitute for understanding the fundamental underlying demand for housing in a region or community when making a decision about building or buying housing.  Few have the patience or knowledge to assess the “effective demand” (the willingness AND ability to purchase) for housing versus the desire to purchase based on the current sentiment about the housing market.  Potential home buyers are not likely to get that understanding from a real estate industry that can make money from a purchase regardless of whether the purchase increases in value or not.   It is easy to see the “effective demand” for housing and the real conditions of the market after the fact, as with the many charts I see that show how  the relationship between home prices and household incomes in a region was widening prior to the last housing market crash.  Its a great way to make a call after the game is over.  Household income data is reported with a lag of more than a year for smaller areas, is subject to a significant margin of error, and may likely be revised sometime  down the road.

There really is no substitute for understanding the fundamentals but a quick and easy way to get a sense of where the home buying market is, is to look at the ratio of the monthly cost of purchasing a home (at the average selling price) versus the monthly cost of an average rental.  Both selling and rental price data is readily available in NH from, among other sources, the NH Housing Finance Authority which regularly does rental price surveys.  The chart below shows the ratio for NH going back to 1990.  The ratios can be calculated for sub-areas of the state and for communities as well.  The ratio is not a substitute for a thorough analysis of “effective” or fundamental underlying demand that all home builders should undertake, but for home buyers, it clearly shows that when the ratio gets above 130% or 140% (which can be determined with a data lag of only a few months at most) a bubble is likely forming.


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