Housing recovery requires tricky balancing act

The Wall Street Journal
Townhouse for sale sign hangs in front of a house in Oakton, Virginia, on the day the National Association of Realtors issues its Pending Home Sales for February report, in Virginia
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"If you build it, they will come."

That strategy works well enough in the movies, but home builders didn't exactly experience a Hollywood ending when the housing bust took hold. Chastened, the industry has built far fewer homes since 2007 than typical. It turns out they weren't quite conservative enough, though, as March inventories of unsold new homes hit the highest since autumn 2011.

Home builders likely had a better month in April. It would be hard not to beat March's shockingly weak annualized rate of 384,000 new-home sales. Not only was that the first year-over-year drop since 2011, but a steep one—more than 13%.

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Economists polled by The Wall Street Journal see new-home sales in April bouncing back to 420,000 when the data are released Friday. That still would be off by nearly 6% year over year, though.

The chief culprit in the recent slowdown is affordability, with median new-home prices up by over 11% year over year and 30-year mortgage rates a full percentage point higher than in March 2013. Put the two together and monthly mortgage payments are about 25% higher.

Recent anxiety about home sales probably is overdone, though, and not just because the frigid winter delayed many sales. The homeownership rate has dropped considerably from its prerecession peak, affected by foreclosures, unemployment and tightened lending standards. Now those demographic and economic factors argue for a return to higher sales than today.

In the decade through 2002, before the housing boom, an average of 810,000 new homes were sold annually. That is equivalent to 940,000 given today's higher population, and more than double the current pace.

For the homeownership rate to stabilize and sales to approach their historical pace, price gains may have to slow. Affordability is still good by historical standards, according to a National Association of Realtors index, but is well off the 2012 peak.

Policy makers at the Federal Reserve who want the economically vital construction sector to thrive even as Americans' personal balance sheets are bolstered by rapidly rising home values may have to accept a trade off.

Pushing mortgage rates down again could keep sales and prices rising sharply in tandem. But that can't go on indefinitely—the economy doesn't live in a field of dreams.



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