Academic journal article ABA Banking Journal

Housing Expansion Gains Traction

Academic journal article ABA Banking Journal

Housing Expansion Gains Traction

Article excerpt

ONE OF THE MOST COMMON questions investors ask is: "When will housing bottom?" The answer is: the winter of 2009.

Evidence is overwhelming that housing activity bottomed last winter. Building permits, new starts, new homes sales, and existing home sales have all moved up from their winter lows. Vacancies and inventories are coming down. Prices are firming as inventories tighten.

The pessimists come back with the refrain that a housing recovery is doubtful and, at best, likely to be muted. Yet, the economic fundamentals don't support that outlook.

Consider the Housing Affordability Index (see chart). Low mortgage rates and lower home prices have made housing the most affordable in the almost 40-year history of this index, compiled by the National Association of Realtors. This is a powerful stimulant to demand, and, together with government aid to housing, such as the $8,000 tax credit for first-time homebuyers, helps explain why housing is finally in an upturn.

In addition to much-improved affordability, there is a growing pent-up demand for houses. The share of home building in the overall Gross Domestic Product (GDP) has fallen to the lowest level in 60 years. As a result, in its latest summary, The State of the Nation's Housing, 2009, the Joint Center for Housing Studies of Harvard University finds that the excess supply of new homes for sale created during the last boom was worked off by the end of 2008. Indeed, the inventory of unsold new homes is down over 50% from its peak three years ago and back to normal levels.

Essentially, housing has been through a big inventory liquidation. …

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