Economists Review Progress on Road to Recovery

The housing market has made great strides in recovering from the problems that ail it, but there are still major improvements that have to occur before it's back up to full health, ""Freddie Mac"":http://www.freddiemac.com/ said Thursday in its latest Economic and Housing Market Outlook.

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The GSE's ""January outlook"":http://www.freddiemac.com/finance/docs/Jan_2014_public_outlook.pdf focuses on four things the market needs to see before it can say the crisis is well and truly behind it: a healthy jobs market, mortgage delinquencies back down to historical averages, home prices that are consistent with payment-to-income ratios, and home sales more in line with historical norms.

Thankfully, all of these indicators are moving in the right direction--but they're not where they need to be just yet, say Freddie Mac economists Frank Nothaft and Leonard Kiefer.

*A Healthy Jobs Market*

Unemployment remains ""stubbornly high,"" the economists say, and December's jobs report--which showed the unemployment rate falling as a result of more Americans giving up on work--wasn't encouraging.

Nevertheless, jobless numbers continue to move in the right direction, bringing them closer to what most economists agree is a good long-run rate: between 5 and 6 percent.

With labor markets moving at their current pace, Freddie Mac predicts it will be another two years before the country is back to ""full employment.""

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*Normal Mortgage Delinquencies*

Since rocketing up in the Great Recession, serious delinquency rates (now around 5.88 percent) have fallen by about half, but they remain well above the long-term normal average of about 2 percent, Nothaft and Kiefer say.

""With continued improvement in the labor market, and increasing house prices, the delinquency rate should continue to fall, but will not be back to normal levels for some time,"" they said.

*Home Prices Consistent with Incomes*

As demonstrated in the build-up to the crash, rapid home price gains paired with meager increases to income create an unsustainable environment. Since mortgage rates have a big impact on monthly payment amounts, the two economists used rate levels as a gauge for how affordability has changed:

""From 1999-2006, mortgage payments on [a] hypothetical 30-year fixed mortgage increased by 50 percent more than income growth in large part because of rapid house-price appreciation. Currently, payment-to-income ratios are only 60 percent of the level we had in 1999 suggesting fixed-rate loans will generally remain manageable for a typical family's budget even with some additional increases in mortgage rates and house prices in 2014.""

*Solid Home Sales*

Historically, the economists say, home sales have averaged about 6 percent of the nation's single-family housing stock at an annual rate. That figure climbed up to 9 percent during the housing boom before plummeting down to around 4 percent. At 2014's expected sales pace of 5.8 million, they say the rate should rise up to 5.7 percent.
However, with all-cash sales accounting for a relatively large share of sales activity, the originations picture still looks muted.

So what does the big picture look like?

""The housing market hasn't fully recovered and has a good ways to go, but it is moving in the right direction,"" the economists conclude. ""Moreover, some markets are recovering faster than others and the home sales recovery is likely to slow with mortgage rates moving higher.""