Is The Housing Recovery For Real?
The big headline number for housing was yesterday’s report that the Case-Shiller Index rose more rapidly on an annual basis than anytime since 2006. Does this mean the housing market is back? Two fundamentals suggest the answer is yes; a third suggests maybe.
House prices are certainly in line with rents right now. Jed Kolko at Trulia shows that in nearly every market, potential buyers with an expected holding period of five years or more and a combined state and local marginal tax rate of 25 percent or higher are better off financially owning than renting.
House prices are also in line with income in all but the most expensive coastal markets. In fact, Numbeo shows that even in our coastal cities, price-to-income ratios are very reasonable by world standards.
But as weak as housing construction has been since the last quarter of 2008 (see below), over the past ten years we have started about 1.23 million houses a year while adding only about 920,000 households per year. That means we still need to account for 300,000 houses per year for us to be at the same place we were ten years ago (which is about when housing construction really took off).
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