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Barometer: Housing, Economy Caught in ‘Unvirtuous’ Cycle

flipping-housesOn the one hand, the housing market is, by most indicators, edging back toward normalcy; but on the other hand, recovery is snagged by a paradox: In order for housing to get better, the economy needs to heal, but the economy can't fully heal without a stable housing market.

According to the latest Trulia Housing Barometer, while home prices, sales, and delinquency rates are all most of the way back to normal, new construction starts and a poor employment rate among young adults are snagging full economic recovery. However, all five indicators have improved year-over-year, if slightly in some areas.

Existing home sales, excluding distressed sales, are the most encouraging stats at the moment. These, according to Trulia and the National Association of Realtors, were 80 percent back to normal in August. That's up from 64 percent in the previous quarter and 79 percent from a year ago. Trulia's Bubble Watch also showed that prices were 3.4 percent undervalued in the third quarter, which is a marked improvement over the13.5 percent undervaluation at the worst of the housing bust. That means prices are three-fourths of the way back to normal.

Delinquency and foreclosure rates also were much improved. According to Trulia and Black Knight, the national delinquency and foreclosure rate was 74 percent back to normal in August—the same as one quarter ago and up from 56 percent one year ago. Trulia's chief economist, Jed Kolko, said that with the share of mortgage borrowers with negative or near-negative equity dropping, the default rate should continue to drop.

Where the trouble lies is in new construction starts, which are not even halfway back to normal, and employment among millennials, which is faring even worse. Though new starts are up from a paltry 37 percent a year ago, they're still only 49 percent back to normal, according to Trulia and the U.S. Census. And according to Kolko, household formation looks too weak to support more single-family homebuilding.

Most distressing is the employment rate for young adults. The barometer showed that as of August, 75.7 percent of adults age 25 to 34 are employed. This is just 37 percent of the way back to normal.

"Because young adults need jobs in order to move out of their parents' homes, form their own households, and eventually become homeowners, the housing recovery depends on Millennials finding work," Kolko said.

That's not to say, however, that housing isn't doing anything for the economy. Rising home prices make homeowners wealthier, and the more wealth people have, the more they spend, Kolko said. In addition, the decline in defaults and foreclosures have helped stabilize the financial system and hard-hit neighborhoods.

"As we've seen, home prices right themselves, as undervalued homes attract investors and other buyers, pushing prices back up," he said. "In turn, higher prices make defaults less likely."

But as the housing recovery continues, it depends less on the rebound effect—the tendency of housing prices to right themselves—and more on such fundamentals as jobs, income growth, and household formation.

"In this recovery, jobs and housing can't get what they need from each other," Kolko said.

About Author: Scott_Morgan

Scott Morgan is a multi-award-winning journalist and editor based out of Texas. During his 11 years as a newspaper journalist, he wrote more than 4,000 published pieces. He's been recognized for his work since 2001, and his creative writing continues to win acclaim from readers and fellow writers alike. He is also a creative writing teacher and the author of several books, from short fiction to written works about writing.

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