Meet the Author

Stephan Whitaker |

Research Economist

Stephan Whitaker

Stephan Whitaker is a research economist in the Research Department at the Federal Reserve Bank of Cleveland. His current work includes research on housing markets and studies of state and local public finance.

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Meet the Author

Christopher Vecchio |

Research Analyst

Christopher Vecchio

Christopher Vecchio is a research analyst in the Research Department of the Federal Reserve Bank of Cleveland. His primary interests include development economics, international economics, and the economics of terrorism.

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10.30.2012

Economic Trends

Is the Housing Recovery Finally on a Solid Foundation?

Stephan Whitaker and Christopher Vecchio

After three years of temporary upturns and recurrent declines, housing prices appear to have finally entered a sustainable recovery. Nationally, home prices are up in year-over-year terms as measured by several indexes. The price increases are observed in most states, and they are generally larger in states that have also had above-average employment growth. The unprecedented accumulations of distressed properties appear to have peaked, so their downward pressure on housing markets should decline in the coming months.

Four national indexes of home prices have all increased in their most recent releases relative to a year ago. The National Association of Realtors’ median sales price for homes sold in August 2012 was 9.46 percent higher than the median in August 2011. CoreLogic’s house-price index was up 4.5 percent over the previous year in its August estimate. The Federal Housing Finance Agency’s (FHFA) house-price index (seasonally adjusted, purchases only) was up 3.71 percent over the 12 months through July 2012. Finally, the closely watched Case-Shiller Composite 20 index was also up 2 percent through August.

If home-price appreciation were limited to a few large states such as Florida and California, it would be much less promising with regards to accelerating economic growth nationally. Fortunately, when we look at indexes that are available for smaller geographies, we find widespread appreciation. The FHFA house-price index was up in 42 states in the second quarter relative to a year before. Pennsylvania had a small decline in house prices, as did six other northeastern states and Oklahoma. Kentucky, Ohio, and West Virginia displayed price increases in the middle of the distribution, between 2 percent and 4 percent. Only Arizona posted an unusually high appreciation rate of approximately 13 percent. However, Arizona’s contribution was not masking stagnation or declines in other regions.

Interest in the recovery of housing is bolstered by its positive reinforcing relationships with employment. Between the second quarter of 2011 and the second quarter of this year, the states that experienced larger gains in employment generally experienced larger increases in their house-price indexes. The positive relationship can be connected in two ways. Growing employment gives households the ability and confidence to invest in homes. Also, housing demand drives demand for labor in fields including construction, remodeling, furnishing and fixtures retail, and lending services. The observed connection between employment and house prices suggests that the price appreciation is supported by households’ ability to pay.

A direct link between housing markets and employment is found in the construction of new homes. When home prices are rising, more households will find new homes to be a viable alternative to existing homes. Starts of single-family homes have increased 27 percent over the previous year, and multifamily housing starts are up 35 percent.

Another crucial point in making the case that the housing recovery is really underway is that the tide of distressed properties is starting to recede. The Mortgage Bankers Association compiles and reports the percentage of mortgages outstanding that are in the foreclosure process, meaning a foreclosure has been filed with the courts, but the home has not yet been auctioned at a sheriff’s sale. This percentage began rising before the recession and continued until the robo-signing lawsuits created a pause. A catch-up increase can be seen in the trend line for the second half of 2010, and the foreclosure inventories were steady through 2011. In Kentucky, Ohio, and West Virginia, the growth of the inventory slowed and turned negative in 2012. Only Pennsylvania is bucking the national trend with continued growth in its foreclosure inventory.

With a lag, the decline in foreclosures will lead to a decline in the supply of discounted properties on the market. Taking a step back in the process, we can look at the mortgages that are delinquent by 60 to 89 days, or more than 90 days. These series also display a steady decline, which, again with a lag, will draw down the flow of homes into foreclosure and bank-owned inventories.

In summary, the increase in house prices is evident in multiple measures and across most of the nation. The price increases are improving along with other critical economic measures, such as employment growth. As foreclosed homes’ downward pressure eases, the housing recovery should be able to take hold and become a contributing sector, rather than a drag on the broader economic recovery.