Notwithstanding Dr. Evil’s failure to appreciate inflation, the number one million still has the power to impress. Take the housing market where the average estimate of the 27 economists polled by The Wall Street Journal for September housing starts, due Friday, is exactly that much.
Of course, a million homes a year isn’t what it used to be. Annualized starts never dipped that low for a single month in the 1960s and, on a population-adjusted basis, they were much higher. In August, there were just three homes built for every 1,000 Americans, at an annualized pace, compared with 7.5 in the 1960s and 6.5 during the housing boom this century. Overall starts have averaged less than 750,000 since the recession ended.
Luckily for policy makers, they control some potent levers. These range from direct and indirect mortgage subsidies to the Federal Reserve’s low interest rates.
Those seemed to be working for a while. For example, 2012 was a banner year as construction and home prices rebounded. Recently, though, progress has been slower than expected. Some blame higher home prices and a rise in mortgage rates in anticipation of an end to extraordinary monetary stimulus efforts. An index of affordability published by The National Association of Home Builders and Wells Fargo & Co. shows that just 63% of Americans at the median income could afford a median-priced home in the second quarter. That is down from 78% in the first quarter of 2012.
Some perspective is warranted. During the housing boom, that index averaged just 47%. Granted, many people bought homes then that they couldn’t afford. But even the preceding decade saw average affordability around today’s level. The recent bond-market rally pushed 30-year fixed mortgage rates down to a 14-month low, which should help home buyers at the margin. Even when rates get back to more normal levels, though, people will continue to leave the nest and climb onto the housing ladder.
Demographic factors should overpower economic ones to push starts back up to well over the million mark—but they may well be more modest dwellings.
View original article at at Wall Stree Journal Online.
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