At our recent economic forecast, I presented data that points to a housing recovery at the national, state and local level. This confounded many real estate professionals who told me after the forecast that they see no apparent signs of a recovery. They exuded gloom and doom and told me of sharply declining home sales when compared to last year. Almost all media accounts reflect a similar pessimistic view of the housing scene.
Year-over-year changes do not define economic recoveries. When, for example, the current national economic recovery began in late 2009, real GDP was still declining 3 percent compared to the prior year. But since real GDP increased 1.5 percent from the prior quarter, the first such quarterly increase since the Great Recession began, a recovery had officially begun.
Similarly, a housing recovery is now underway in Orange County. Although it may be hard to see, the fundamental economic factors bringing it about are certainly in place.
Chief among them is the sharp drop in mortgage rates. Since peaking at a rate of 4.9 percent last November, it dropped sharply to 3.8 percent in June. The implications of this dramatic drop in the mortgage rates translates to real savings for homebuyers. Purchasing a median-priced home in Orange County at a 4.9 percent rate in November resulted in monthly P & I payments of about $3,400. By June, with the mortgage rate at 3.8 percent, those P & I payments dropped to $3,000. That’s a monthly savings of $400. Even more important, the minimum qualifying annual income for approval of that mortgage decreased from $164,000 to $142,000.
Another factor undergirding a housing recovery is a strong wealth effect. Fueled largely by hefty stock market gains since December, the net worth of families has increased sharply. Although data on wealth are not available at the local level, the 14 percent annualized increase in net worth in the country likely mirrors Orange County. With fundamentals like these, why all the gloom and doom about the housing sector?
No question, year-to-year comparisons on home sales are still negative. In the most recent O.C. Housing Report it was reported that it took, on average, 89 days to sell a home compared to 73 days a year earlier. But that increase in the market time to sell a home in the county gives a false signal of economic weakness.
In fact, the market has strengthened and has been in a recovery mode since early this year when it was still reeling from the impact of high mortgage rates. In January, it took, on average, 152 days to sell a home compared to 77 days the prior year. That means it took 75 more days to sell a home. That difference of 75 days points to a very weak, perhaps even recessionary housing market. That was the sorry status of the housing sector at the beginning of this year.
Now, only half a year later, the average number of days to sell a home in the country is 89 days. While that is still higher than last year’s 73 days, the difference is only 16 days. That decrease from 75 additional days at the beginning of the year to 16 additional days in June points to a much stronger housing market when compared to the very weak market that existed six months ago. Although the market is still weaker than last year, it’s stronger than it was in January. That fact points to a solid economic recovery.
This recovery can also be seen in the number of home sales. This critically important market indicator for residential realtors, brokers, title agents and mortgage bankers is still about 19.9 percent lower than the sales rate in March 2019. But that’s an improvement over the year-over-year drop of 23.4 percent experienced last December.
The recovery in home sales is even more clearly seen in California where home sales data are available through May. In January, home sales in California were 12.5 percent lower than the prior year. Only four months later, in May 2019, home sales were roughly the same as that registered in May 2018. The fact that sales matched last year’s level might strike some as nothing to crow about. To an economist that’s the stuff of a real economic recovery.
As long as mortgage rates remain at or below 4 percent, I am confident that the housing recovery will continue and grow in strength during the second half of the year. By then, year-over-year increases in home sales will finally turn attitudes from pessimism to optimism. But I’m already there.
James L. Doti is president emeritus and professor of economics at Chapman University.
