Report: Jobs Recovery to Drive Up Home Prices

Even as housing inventory starts to recover, the basic fundamentals of supply and demand--as measured by new starts versus job growth across the nation--point to continued price growth, according to one expert at ""John Burns Real Estate Consulting"":http://www.realestateconsulting.com/.

[IMAGE]

""Price appreciation is largely driven by the degree to which demand exceeds supply,"" said senior consultant Adam Artunian. ""While the best short-term measure of the housing demand/supply balance is months of supply of homes on the market, the best long-term measure is the ratio of household formations to new home construction.""

However, since the firm regards household formation data as ""highly unreliable,"" Artunian's analysis uses job growth as a substitute, taking for a given that there are typically 1.2 jobs per household.

[COLUMN_BREAK]

Nationally, the employment growth-to-permit (E/P) ratio is 2.5, up from 2.3 last year and well above the ""equilibrium level"" of 1.2. Eighteen of the top 20 markets have an E/P ratio higher than the equilibrium.

According to Artunian, demand exceeds supply the most in many markets that are still in the very early stages of recovery--such as Chicago, where job growth exceeds permit growth by a factor of seven. Parts of Texas, such as Dallas and Houston, are also experiencing job growth outpacing new homes, even with construction picking up speed.

Meanwhile, price growth is stunted in markets in the Midwest and along the East Coast, owing largely to distressed supply. Once those excesses clear, ""these markets are poised to appreciate quite well,"" Artunian said.

Overall, the analysis shows demand still exceeds supply in 90 percent of major markets.

In addition, Artunian believes the connection between job growth and price gains will become more pronounced as other market trends--such as inventory and mortgage rates--stabilize.

""It is important to note that in most markets elevated E/P ratios are primarily the result of historically low housing supply, rather than strong job growth,"" he said. ""Price appreciation will be even more closely tied to job creation as new supply comes online and mortgage rates continue to rise to more historic norms.""