There are clear signs of the housing market stabilizing, both in our daily real estate transactions and in published economic sources. The following analysis is exerpted from an article by the Federal Reserve Bank of Texas.  The emphasis in the highlighted sections is mine.  TRM

Housing Market Stabilizing“…When will the housing market stabilize and support the economic recovery? We suggest that new home construction may stabilize and start recovering slowly within the next year or so. Our econometric results also indicate that national house prices may hit bottom late this year or in early 2012 and then recover slowly…

The most recent house price and construction run-up exceeded levels recorded during the 1990’s economic expansion, when unemployment rates fell even lower and income grew faster. Why is this? Standard econometric models [of supply and demand] … simply cannot explain the surging house prices and building seen in the mid-2000’s.

Our research suggests the missing factor is mortgage credit standards, which, with other factors, determine whether potential homebuyers qualify for a loan. More people qualified for a mortgage during the so-called subprime boom because lenders eased the minimum down-payment ratios, maximum debt-payment-to-income rations, minimum credit scores and other criteria…

During the subprime boom, construction of single-family homes surged to a high of 1.8 million units per year, far above the 1.1 million units required to cover population growth and physical depreciation of structures. Construction then collapsed, falling roughly 75 percent from the peak by mid-2009… [I]n June 2009, housing permits picked up somewhat, aided by a series of federal tax credit programs, many aimed at first-time homebuyers… Before expiring, these tax credits temporarily boosted home transactions, partly by shifting sales forward, although the housing market’s fundamental weakness remained…

Affordability has [since] improved, and the impact of the supply overhang may be overstated because deeply underwater and foreclosed homes are concentrated in a handful of states, including Arizona, California, Florida and Nevada. With job growth expanding in areas where less overbuilding occurred, housing starts will likely pick up in states such as Texas. Additionally, as the economic recovery continues, the pace of household formation is likely to rise, bolstering demand. On balance, many forecasters see single-family home construction recovering slowly to around 500,000 units next year from an annual rate of 400,000 in early 2011…

The housing sector contributes to gross domestic product growth directly via new home construction and indirectly through consumer spending. In the early and mid-2000s, the contribution was large. When the subprime bubble burst, housing exerted a substantial drag on the economy. The loan losses and increased uncertainty that accompanied the bust also slowed the economy by impairing the ability of financial intermediaries and securities markets to provide finance. Although the short-run outlook for the housing market is uncertain, it appears that new home construction and house prices at the national level will stabilize and start slowly recovering within the next year or so.”

Exerpted from When Will the U.S. Housing Market Stabilize? By John V. Duca, David Luttrell and Anthony Murphy, Feberal Reserve Bank of Dallas, Vol. 6, No. 8, August 2011.

Roger Martin